Unit 15, 16, and 14 Quizzes

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) $1,500C) $3,500D) $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]

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) $180,000B) $205,000C) $230,000D) $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]

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]

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) $35,000B) $15,000C) $10,000D) $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) $0B) $10,000C) $14,000D) $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: $2,000Based on the above facts, what is the amount of A's taxable income? A) $69,000B) $70,000C) $140,000D) $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: $104,000Add back: Federal income tax: $35,000Net capital loss: $4,000Excess book depreciation: $2,000= $145,000Subtract: Tax-exempt interest: $(5,000)Taxable income: $$140,000[1]

Bob acquired a 50% interest in a partnership by contributing depreciable property that had an adjusted basis of $15,000 and a fair market value of $45,000. The property was subject to a liability of $32,000, which the partnership assumed for legitimate business purposes. What is the partnership's basis in the property for depreciation? A) $0B) $13,000C) $15,000D) $16,000

C) $15,000 This answer is correct. The partnership's basis for contributed property is the adjusted basis of such property to the contributing partner at the time of contribution, plus any gain recognized by the partner related to the property. But, because liability relief creates gain through a deemed cash distribution, the gain does not increase the partnership's basis. However, Bob is required to recognize $1,000 ($15,000 adjusted basis - $32,000 liability + 50% interest × $32,000 liability) upon contribution of the asset in order to bring his basis in the partnership up to zero.The partner's basis is $0 and the basis of the contributing partner carries over to the partnership.[1]

Gray is a 50% partner in Fabco Partnership. Gray's tax basis in Fabco on January 1, 2022, was $5,000. Fabco made no distributions to the partners during 2022 and recorded the following:- Ordinary income: $20,000- Tax-exempt income: $8,000- Portfolio income: $4,000What is Gray's tax basis in Fabco on December 31, 2022? A) $21,000B) $16,000C) $12,000D) $10,000

A) $21,000 The partner's initial basis in the partnership interest is adjusted upward or downward for the partner's distributive share of partnership taxable income (loss) and for separately stated taxable and nontaxable items. Thus, Gray must increase the $5,000 basis by 50% of each of the $20,000 of ordinary income, the $8,000 of tax-exempt income, and the $4,000 of portfolio income.[1]

Stone owns 100% of an S corporation and materially participates in its operations. The stock basis at the beginning of the year is $5,000. During the year, the corporation makes a distribution of $3,500 and passes through a loss from operations of $2,000 for the year. What loss can Stone deduct on Stone's personal tax return?A) $0B) $1,500C) $2,000D) $5,500

B) $1,500A shareholder's pro rata share of passed-through losses in excess of basis in the S corporation is not deductible. After the distribution, Stone's adjusted basis is...Stock basis at the beginning of the year: $5,000Less: Distribution: $(3,500)= Adjusted basis: $1,500Therefore, Stone can deduct $1,500 of the passed-through loss on his tax return. The excess $500 ($2,000 - $1,500) is suspended and carried forward indefinitely. It is deductible when the shareholder's amount at risk has increased.[1]

Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan's basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?A) $38,000B) $40,000C) $80,000D) $118,000

C) $80,000An S corporation shareholder is required to take the pro rata share of items passed through into account in computing the shareholder's personal taxable income for his or her tax year within which the tax year of the S corporation ended. The S corporation had $200,000 of operating income, and Evan is a 40% shareholder. Therefore, Evan must report $80,000 ($200,000 × 40%) of income from the S corporation.[2]

Sunshine Partnership is owned equally by partners Buddy, Jeb, and Bob. Sunshine owns an intangible asset with a basis of $0 and a fair market value of $800, a printing machine with a basis of $300 and a fair market value of $2,000, and a collating machine with a basis of $150 and a fair market value of $200. Bob has a basis of $400 in his partnership interest. The intangible asset and the collating machine are distributed to Bob in liquidation of his interest. What are Bob's bases in his intangible asset and collating machine?1. Machine2. Intangible A) 1. $400: 2. $0B) 1. $150: 2. $0C) 1. $165: 2. $235D) 1. $200: 2. $200

C) 1. $165: 2. $235 The Taxpayer Relief Act of 1998 modified the allocation of basis to distributed property. Under the new law, the distributee partner's basis in his or her partnership interest is first allocated to unrealized receivables and inventory. If the distributee partner's allocable basis exceeds the basis the partnership had in the distributed unrealized receivables and inventory, that remaining basis is allocated among any other assets to the extent of the partnership's basis in the other distributed assets. To the extent allocable basis exceeds the partnership's basis in the other distributed assets, it is allocated in relation to the unrealized appreciation in those assets. Finally, any remaining basis is allocated among those assets based on the relative fair market value of those assets.Therefore, Bob must first allocate basis to the collating machine ($150) since the intangible asset has no basis. Next, the remaining basis is allocated among the two assets based on the unrealized appreciation in those assets. The intangible asset would be allocated a basis of $235 [($800 ÷ $850) × $250], and the collating machine would receive basis of $15 [($50 ÷ $850) × $250]. The total bases allocated to the collating machine and the intangible asset are $165 and $235, respectively.[2]

Which of the following limitations will apply in determining a partner's deduction for that partner's share of partnership losses if the partner is an individual?1. At-Risk2. Passive Loss A) 1. Yes: 2. NoB) 1. No: 2. YesC) 1. Yes: 2. YesD) 1. No: 2. No

C) 1. Yes: 2. Yes Each partner may deduct no more of his or her distributive share of partnership loss than the amount for which (s)he is at risk in the partnership. Each partner's share is passive unless the partner materially (or actively) participates in the partnership activity. Thus, each partner must apply passive limits to his or her distributive share. These rules do not apply to partners who are widely held corporations.[1]

In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is... A) A tax year that results in the greatest aggregate deferral of income.B) A calendar year.C) A tax year of one or more partners with a more-than-50% interest in profits and capital.D) A tax year of a principal partner having a 10% or greater interest.

C) A tax year of one or more partners with a more-than-50% interest in profits and capital. Unless an exception applies, the partnership must use a required tax year. A required tax year is the first of (1) the tax year of partners owning more than 50% of partnership capital and profits if they have the same year as determined on the first day of the partnership's tax year, (2) the same tax year of all principal partners (i.e., partners owning 5% or more of capital or profits), or (3) the least aggregate deferral tax year. In the absence of an election to adopt an annual accounting period, the partnership must use the tax year of partners owning more than 50% interest in profits and capital.[1]

Bobby owns 50% of Jingles, Inc., an S corporation filing tax returns on a calendar year. For tax year 2022, the corporation has an operating loss of $15,000 and separately stated tax-exempt income of $10,000. Bobby individually loans the corporation $4,000. His basis on January 1, 2022, is $2,000. What is his basis in the stock at year end 2022?A) $1,000B) $3,500C) $(9,000)D) $0

D) $0The IRC provides guidelines for adjustments to the basis of a shareholder's S corporation stock. The increases include items of income (including tax-exempt income) that are passed through to the shareholder, nonseparately stated (ordinary) income, and the excess of deductions for depletion over the basis of the property subject to depletion. A loan made to an S corporation also increases the shareholder's basis for the amount of the loan. The basis of Bobby's stock is decreased by the amount of loss allocable to him; however, it cannot reduce his basis below zero.Stock Basis:- Basis at January 1: $2,000- Tax-exempt interest: $5,000- Ordinary loss of S corporation: $(7,000)= Basis at December 31: $0Loan Basis:- Loan to corporation: $4,000- Ordinary loss of S corporation: $(500)= Basis at December 31: $3,500[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.

Which one of the following conditions will prevent a corporation from making a valid S election? A) A corporation that has an estate as a shareholder.B) A corporation that is a member of an affiliated group.C) A corporation that has only one class of stock.D) A corporation that has nonresident aliens as shareholders.

D) A corporation that has nonresident aliens as shareholders. A small business corporation (S corporation) is defined in Section 1361. Section 1361(b)(1)(C) specifically prohibits an S corporation from having a nonresident alien as a shareholder. Thus, a corporation having a nonresident alien as a shareholder would be ineligible for S corporation status.

With regard to S corporations and their shareholders, the "at-risk" rules applicable to losses...A) Depend on the type of income reported by the S corporation.B) Are subject to the elections made by the S corporation's shareholders.C) Take into consideration the S corporation's ratio of debt to equity.D) Apply at the shareholder level rather than at the corporate level.

D) Apply at the shareholder level rather than at the corporate level.The at-risk rules do not apply directly to S corporations. They apply directly to individuals as shareholders of S corporations. The at-risk rules limit a shareholder's deduction for losses and other deductions from an S corporation to the total of (1) the adjusted basis of the shareholder's stock in the S corporation and (2) the shareholder's adjusted basis of any debt owed by the S corporation to the shareholder.[1]

Bob and Sally, unmarried taxpayers, each owned 50% of Lostalot, Inc., an S corporation. The corporation had a $50,000 operating loss for the tax year ending December 31, 2022. As of December 31, 2021, Bob's basis in his stock was $15,000 and Sally's was $5,000. During the 2022 tax year, Sally mortgaged her home for $25,000 and loaned the money to the corporation. Although not personally liable, Bob told her not to worry and that if anything happened, he would help pay the mortgage debt. Calculate the amount of allowable loss deduction each shareholder would be able to recognize on their individual 2022 tax returns.A) Bob: $25,000, and Sally: $25,000.B) Bob: $15,000, and Sally: $5,000.C) Bob: $15,000, and Sally: $30,000.D) Bob: $15,000, and Sally: $25,000.

D) Bob: $15,000, and Sally: $25,000.Bob and Sally's share of the loss is $25,000 each. However, the deduction for each is limited to their basis in the S corporation. Bob's deduction is limited to his $15,000 basis in the stock. Sally's basis consists of her $5,000 stock basis and her $25,000 debt basis. Sally has enough basis to cover her share of the loss. Bob receives no debt basis from the mortgage debt because he is not personally liable.[1]

Which of the following entities must pay taxes for federal income tax purposes? A) General partnership.B) Limited partnership.C) Joint venture.D) C corporation.

D) C corporation. Corporate taxable income computations generally parallel those for individuals. General tax is determined by applying applicable tax rates to taxable income. Shareholders are then subject to federal income tax on distributions out of corporate earnings and profits. In addition to regular income tax, a C corporation may also be subject to the AMT. Partnerships and joint ventures are all pass-through entities, which are taxed at the individual level, not the partnership level.[1]

Which of the following may not own shares in an S corporation? A) Individuals.B) Estates.C) Trusts.D) Corporations.

D) Corporations. Shareholders are limited to individuals, estates, qualified trusts, banks, and certain tax-exempt entities (e.g., certain charities with qualified pension plans). A C corporation, an entity subject to the federal corporate income tax, may not own shares in an S corporation.

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]

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) $94,000B) $100,000C) $104,000D) $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]

Bow, Inc., an S corporation, has three equal shareholders. For the year ended December 31, 2022, Bow had taxable income of $300,000. Bow made cash distributions totaling $120,000 during 2022. For 2022, what amount from Bow should be included in each shareholder's gross income?A) $140,000B) $100,000C) $60,000D) $40,000

B) $100,000Each shareholder includes in his or her personal gross income his or her share of ordinary income and separately stated items of the S corporation on a per-day and per-share basis. Each shareholder's share is 1/3 of $300,000. Shareholder inclusion will be $100,000 each. Excess distributions are treated as tax-free return of capital.

Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 recourse mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace? A) $0 B) $16,000 C) $26,000 D) $32,000

A) $0 A partner's basis in a partnership equals the adjusted basis of the property contributed plus the partner's share of all partnership liabilities minus any liability of the partner assumed by the partnership. A liability assumed by the partnership is treated as a distribution to the partner. The basis of this partnership interest is the basis of the contributed land ($16,000) reduced by the liability assumed by the partnership ($24,000) and increased by the partner's share of recourse partnership liabilities ($6,000 = $24,000 × 0.25) and recognized gain on contributed property ($2,000). Thus, the basis will be $0. [1]

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) $0B) $2,000C) $5,000D) $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]

Gavin, a 50% partner in the ABC Partnership, had a $4,000 basis at the beginning of the preceding year. During the preceding year, ABC incurred a $12,000 loss. In the current year, ABC reported $7,000 of ordinary income and made a $1,000 pro rata distribution. What is Gavin's basis at the end of the current year? A) $1,000B) $3,000C) $3,500D) $6,500

A) $1,000 In the preceding year, Gavin's basis of $4,000 is reduced to $0 after ABC's $12,000 loss (Gavin's share of the loss is $6,000). Basis is not reduced below zero, and Gavin has an excess loss of $2,000 ($4,000 - $6,000). In the current year, $3,500 of ABC Partnership's ordinary income is added to Gavin's basis. The excess loss from the preceding year is deductible in a subsequent year in which the adjusted basis is greater than zero. Therefore, Gavin's basis of $3,500 is reduced by the $2,000 excess loss. Additionally, 50% of the pro rata distribution is deducted from Gavin's basis. Gavin's basis at the end of the current year is $1,000 ($1,500 - $500).[1] [2]

Pert contributed land with a fair market value of $20,000 to a new partnership in exchange for a 50% partnership interest. The land had an adjusted basis to Pert of $12,000 and was subject to a $4,000 mortgage, which the partnership assumed. What is the adjusted basis of Pert's partnership interest? A) $10,000 B) $12,000 C) $18,000 D) $20,000

A) $10,000 The basis of an interest in a partnership acquired by the contribution of property is the adjusted basis of such property to the contributing partner. A decrease in a partner's personal liabilities by reason of the assumption by the partnership of such liabilities is treated as a distribution of money to the partner, which in turn reduces the basis of the partner's interest (but not below zero). When Pert became a 50% partner, his net liability relief was 50% of the $4,000 mortgage. Pert's basis in his partnership interest is the $12,000 basis in the property contributed less the $2,000 of liability relief (limited to zero). [1]

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) $18,800B) $30,000C) $15,000D) $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]

Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2022 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2022 partnership income consisted of...- Net business income before guaranteed payments: $80,000- Net long-term capital gains: $10,000What amount of income should Evan report from Vista Partnership on her 2022 tax return? A) $37,500B) $27,500C) $22,500D) $20,000

A) $37,500 A partner will report the ownership portion of the partnership income. Partnership income is the balance of the taxable income of a partnership that is not required to be separately stated. Capital gains and losses are generally segregated from ordinary net income and carried into the income of the individual partners. Any guaranteed payment (GP), while deductible for the partnership, is included in gross income of the receiving partner. Reportable income is calculated as follows:Business income pre-GP: $80,000Less: GP: $(20,000)= Reportable partnership income: $60,00025% interest: $15,000Guaranteed payment: $20,00025% capital gain: $2,500= Total: $$37,500[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) $0D) $(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]

Fact Pattern: Jones and Curry formed Major Partnership as equal partners by contributing the assets below: *Jones:- Asset = Cash- Adjusted Basis = $45,000- Fair Market = $45,000Curry:- Asset = Land- Adjusted Basis = $30,000- Fair Market = $57,000The land was held by Curry as a capital asset, subject to a $12,000 mortgage, which was assumed by Major.What was Jones's initial basis in the partnership interest? A) $51,000B) $45,000C) $39,000D) $33,000

A) $51,000 The basis of an interest in a partnership acquired by the contribution of property is the adjusted basis of the property contributed to the partnership plus the partner's share of liabilities assumed by the partnership. Jones's initial basis in the partnership is $45,000 plus one-half of the $12,000 mortgage assumed by the partnership (or $6,000). Thus, Jones's basis in the partnership is $51,000. [2]

Wanda owns 100% of S corporation, Milk Enterprises. At the beginning of 2022, she had a zero basis and an unused ordinary loss carry over from Milk Enterprises in the amount of $5,000. During the year, Wanda secured a bank loan of $10,000 on her personal residence and made a shareholder loan of that amount to Milk Enterprises. At the end of 2022, Milk Enterprises reported on its Schedule K a $1,000 ordinary loss and a $3,000 cash distribution made to Wanda. Wanda has $10,000 in flow-through reportable income from other S corporations. How much of Milk Enterprises' ordinary loss can Wanda deduct on her personal return?A) $6,000 in loss.B) $5,000 in loss.C) $3,000 in loss.D) $0 in loss.

A) $6,000 in loss.Section 1366(a) provides that an S corporation shareholder includes his or her pro rata share of loss from the S corporation. Each shareholder's deduction for his or her share of the ordinary loss and the separately stated loss and deduction items is limited to the sum of the adjusted basis for his or her S corporation stock plus the adjusted basis of any indebtedness owed directly by the S corporation to the shareholder. Wanda begins with a zero stock basis. The loan increases her debt basis to $10,000. The $3,000 distribution in excess of stock basis generates a capital gain (the debt basis cannot be used to avoid gain on a distribution). However, the debt basis does allow Wanda to take the $1,000 ordinary loss plus the $5,000 carryover, reducing her debt basis to $4,000.[1] [2]

Partnership LIFE's profits and losses are shared equally among the four partners. The adjusted basis of Partner E's interest in the partnership on December 31, Year 1, was $25,000. On January 2, Year 2, Partner E withdrew $10,000 cash. The partnership reported $200,000 as ordinary income on its Year 2 partnership return. In addition, Partner E's share of nondeductible entertainment expense was $5,000. What is the amount of E's basis in the partnership on December 31, Year 2? A) $60,000B) $61,000C) $65,000D) $71,000

A) $60,000 The adjusted basis of a partner's interest is the original basis of such interest, increased by the partner's distributive share of the partnership's income and allocable portion of liabilities, and decreased by the partner's distributive share of partnership loss and distributions (Secs. 705, 733, and 752). Partnership basis is also reduced by nondeductible expenses.Beginning basis: $25,000Ordinary income ($200,000 × 25%): $50,000Cash distribution: $(10,000)Entertainment expense: $(5,000)= Year-end basis: $60,000

Lee inherited a partnership interest from Dale. The adjusted basis of Dale's partnership interest was $50,000, and its fair market value on the date of Dale's death (the estate valuation date) was $70,000. What was Lee's original basis for the partnership interest? A) $70,000B) $50,000C) $20,000D) $0

A) $70,000 The original basis in a partnership interest of a person who acquired it by inheritance is the fair market value of the interest on the date of death (if the estate does not elect the alternate valuation date).[1]

The S corporation status can be revoked only if the shareholders who collectively own more than what percentage of the outstanding shares in the S corporation's stock consent to its revocation? A) 50%B) 66 2/3%C) 75%D) 80%

A) 50% Section 1362(d)(1) provides that an S corporation's status may be revoked by an election of the shareholders holding more than half of the shares of a corporation.

Which of the following statements is true? A) For property that was an unrealized receivable in the hands of the contributing partner, any gain or loss on a disposition by the partnership is ordinary income or loss.B) An individual cannot acquire an interest in partnership capital as compensation for services performed or to be performed.C) A partner recognizes a gain or loss when the partner contributes to the partnership in exchange for a partnership interest.D) If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, and gain or loss for the property is the fair market value at the time of the contribution.

A) For property that was an unrealized receivable in the hands of the contributing partner, any gain or loss on a disposition by the partnership is ordinary income or loss. The term "unrealized receivable" includes any rights to income that have not been included in gross income under the method of accounting employed. Under Sec. 724, unrealized receivables and inventory items contributed by the partner to the partnership retain their ordinary income character in the hands of the partnership. Unrealized receivables remain ordinary income property up to the time of disposal by the partnership, and inventory items remain ordinary income property for the 5-year period beginning on the date of contribution (Sec. 735).[1] [2]

Which of the following items included in ordinary income must be stated separately for each partner? A) Guaranteed payments to partners.B) Ordinary income from subsidiaries.C) Employee benefit programs.D) Depreciation.

A) Guaranteed payments to partners. Guaranteed payments are subtracted as expenses for computing taxable income but also separately stated as income to the recipient partner.

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 incomeII. 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.

During the current year, Norman contributed property held more than 1 year to the MaryAnn Partnership for a 40% interest. The total capital after his contribution was $50,000. His tax basis in the property was $8,000, and it had a fair market value of $10,000 at the time of the contribution to the partnership. What gain or loss should Norman report on the contribution of his property to the partnership? A) No gain or loss. B) $2,000 long-term capital gain. C) $12,000 long-term capital gain. D) $12,000 long-term capital gain of which $10,000 is deferred.

A) No gain or loss. This answer is correct. When property is contributed to a partnership in exchange for a partnership interest, the general rule is that no gain or loss is recognized by the partner or the partnership. This rule applies even though the contributed property is appreciated and the partner receives a disproportionate interest in the partnership. Precontribution gain on the asset will be allocated to the contributing partner when the partnership later sells the asset. Property does not include services, however, and if Norman received part of his interest in the partnership for performing services, he must recognize ordinary income to that extent. [1]

Which of the following conditions will prevent a corporation from qualifying as an S corporation? A) The corporation has both common and preferred stock.B) The corporation has one class of stock with different voting rights.C) One shareholder is an estate.D) One shareholder is a grantor trust.

A) The corporation has both common and preferred stock. An S corporation may have only one class of stock.[1]

Bailey contributed land with a fair market value of $75,000 and an adjusted basis of $25,000 to the ABC Partnership in exchange for a 30% interest. The partnership assumed Bailey's $10,000 recourse mortgage on the land. What is Bailey's basis for his partnership interest? A) $15,000B) $18,000C) $65,000D) $75,000

B) $18,000 A partner's basis in a partnership equals the adjusted basis of the property contributed plus the partner's share of all partnership liabilities minus any liability of the partner assumed by the partnership. A liability assumed by the partnership is treated as a distribution to the partner. The basis of this partnership interest is the basis of the contributed land ($25,000) reduced by the liability assumed by the partnership ($10,000) and increased by the partner's share of partnership liabilities ($3,000 = $10,000 × 30%).

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) $15,000B) $18,750C) $22,500D) $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%].

Bern Corp., an S corporation, had an ordinary loss of $36,500 for the year ended December 31, 2022. On January 1, 2022, Meyer owned 50% of Bern's stock. Meyer held the stock for 40 days in 2022 before selling the entire 50% interest to an unrelated third party. Meyer's basis for the stock was $10,000. Meyer was a full-time employee of Bern until the stock was sold. Meyer's share of Bern's 2022 loss was...A) $0B) $2,000C) $10,000D) $18,250

B) $2,000The amount of each S corporation item, which each shareholder takes into account, is computed on a per-day and per-share basis. The portion of the loss passed through to Meyer is:$36,500 × 50% × (40 / 365) = $2,000

Rich Corporation, an S corporation since its organization, is owned entirely by Mr. Rich. The corporation uses a calendar year as its taxable year. Mr. Rich paid $200,000 for his Rich stock when the corporation was formed on January 1, 2022. For 2022, Rich Corporation reported the following results:- Ordinary income: $40,000- Tax-exempt bond interest income: $6,000- Short-term capital loss: $(3,000)No distributions were made during 2022. What is the basis of Mr. Rich's stock on December 31, 2022?A) $240,000B) $243,000C) $246,000D) $249,000

B) $243,000The adjusted basis of the shareholder's stock is figured at year end with increases for the shareholder's pro rata share of all income items, including tax-exempt income, that are separately stated and any nonseparately stated income. Also, all separately and nonseparately stated losses and deduction items decrease the basis of the shareholder's stock on a pro rata basis. Mr. Rich's stock basis on December 31, 2022, is $243,000 ($200,000 beginning basis + $40,000 ordinary income + $6,000 tax-exempt bond interest income - $3,000 short-term capital loss).

Rap, Inc., was organized in January 2022 and immediately made an S election. Rap, Inc.'s stock is entirely owned by Howard, who contributed $40,000 to start the business. Rap reported the following results for the 2022 year:- Ordinary income: $36,000- Short-term capital loss: $4,000- Charitable contributions: $1,000- Tax-exempt income: $1,000- Sec. 179 deduction: $10,000On April 12, 2022, Howard received a $30,000 cash distribution from the corporation. What is the adjusted basis of his stock on January 1, 2023?A) $41,000B) $32,000C) $31,000D) $10,000

B) $32,000The adjusted basis of the shareholder's stock is figured at year end with increases for the shareholder's pro rata share of all income items, including tax-exempt income, that are separately stated and any nonseparately stated income. Also, all separately and nonseparately stated losses and deduction items decrease the basis of the shareholder's stock on a pro rata basis. Howard's stock basis on January 1, 2023, is $32,000.Original basis: $40,000Ordinary income: $36,000Tax-exempt income: $1,000Short-term capital loss: $(4,000)Charitable contributions: $(1,000)Sec. 179 deduction: $(10,000)Cash distribution: $(30,000)= Adjusted basis: $32,000

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: $3,000What would PDK report as non-separately stated income for Year 1 tax purposes? A) $30,000B) $35,000C) $43,000D) $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 contributionsGuaranteed 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: $7,500What 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) $500,000B) $492,500C) $450,000D) $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]

Jane has a 30% interest in a cash-basis general partnership. Her adjusted basis in the partnership was $50,000 at the beginning of Year 1. There were no distributions to Jane during the year. On August 1, Year 1, the partnership borrowed $200,000 for the following reasons:- Purchase depreciable business equipment: $30,000- Pay balance on existing note in full: $170,000All of the partners are personally liable for all partnership debts. The partnership incurred a $250,000 loss in Year 1. What amount can Jane claim as a loss from the partnership on her Year 1 individual income tax return? A) $50,000B) $59,000C) $60,000D) $75,000

B) $59,000 A partner may deduct his or her distributive share of partnership loss only to the extent of his or her adjusted basis in the partnership at the end of the year in which the loss occurs. Jane's adjusted basis at year end is:- Adjusted basis at beginning of year: $50,000- Plus: Jane's allocable share of recourse liabilities ($200,000 × 30%): $60,000- Less: Jane's allocable share of reduction in recourse liabilities ($170,000 × 30%): $(51,000)= Adjusted basis at end of year before loss: $59,000Jane's distributive share of the loss is $75,000 ($250,000 × 30%). However, Jane's allowable loss for the year is limited to her end-of-the-year basis of $59,000.[1] [2]

Molloy contributed $40,000 in cash in exchange for a one-third interest in the RST Partnership. In the first year of partnership operations, RST had taxable income of $60,000. In addition, Molloy received a $5,000 distribution of cash and, at the end of the partnership year, had a one-third share in the $18,000 of partnership recourse liabilities. What was Molloy's basis in RST at year end? A) $55,000B) $61,000C) $71,000D) $101,000

B) $61,000 A partner's initial basis in the partnership interest received is equal to any cash contribution made. The basis of a partner's interest in a partnership is adjusted up for allocable share of partnership taxable income and increases in the partner's share of partnership liabilities and adjusted down for distributions from the partnership to the partner. Molloy's basis at year end is $61,000 ($40,000 initial basis + $20,000 taxable income - $5,000 distribution + $6,000 liability assumed).[1]

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: $30,000The partnership has no other liabilities. The basis for Pink's partnership interest is... A) $70,000B) $85,000C) $100,000D) $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: $100,000Less: 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. Obligations2. Current State Corporation Income Tax Expense A) 1. Yes: 2. YesB) 1. No: 2. NoC) 1. Yes: 2. NoD) 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]

An S corporation must adhere to all of the following conditions except having... A) No more than 100 shareholders.B) A nonresident alien as a shareholder.C) An individual as a shareholder.D) One class of stock.

B) A nonresident alien as a shareholder. A nonresident alien may not own shares in an S corporation. Shareholders must be citizens or residents of the U.S.

Which of the following will prevent a corporation from qualifying as an S corporation? A) Deriving more than 40% of its gross receipts from passive income sources.B) Having a partnership as a shareholder.C) Owning more than 50% of the stock of a domestic corporation.D) Having 100 shareholders.

B) Having a partnership as a shareholder. An S corporation may not have more than 100 shareholders; shareholders who are not individuals, estates, or certain kinds of trusts; a nonresident alien as a shareholder; or more than one class of stock [Sec. 1361(b)]. Having a partnership as a shareholder will prevent a corporation from making an S corporation election.

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]

The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account... A) Begins with the date of contribution to the partnership. B) Includes the period during which the property was held by the contributing partner. C) Is equal to the contributing partner's holding period prior to contribution to the partnership. D) Depends on the character of the property transferred.

B) Includes the period during which the property was held by the contributing partner. The partnership's holding period for contributed property includes the period of time the property was held by the contributing partner. The holding period of the partner "tacks on" because the partnership receives a carryover basis in the contributed property. This is true even if the contributing partner recognizes a gain or loss (due to being relieved of debt in excess of basis).

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 method used to depreciate partnership property is an election made by... A) The partnership and must be the same method used by the principal partner.B) The partnership and may be any method approved by the IRS.C) The principal partner.D) Each individual partner.

B) The partnership and may be any method approved by the IRS.The partnership, although a conduit, is an entity distinct from the partners for certain tax purposes. Elections available with respect to the treatment of partnership items are generally made by the partnership. Accounting method and depreciation method elections, for example, are made by the partnership.[1]

"Hot assets" of a partnership would include which of the following? A) Cash.B) Unrealized receivables.C) Section 1231 assets.D) Capital assets.

B) Unrealized receivables. A sale or exchange of a partnership interest results in capital gain or loss, except that any gain realized attributable to "hot assets" is ordinary income. "Hot assets" include unrealized receivables and inventory.[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) $150,000B) $201,000C) $205,000D) $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: $148,000Add back: Federal income tax: $55,000Life insurance premiums: $17,000=$220,000Subtract: Tax-exempt interest: $(15,000)= Taxable income: $205,000[2]

Mr. Almond farmed a total of 200 acres of land, comprised of two parcels of land located about one-half mile apart. One parcel was 120 acres, and the second parcel was 80 acres. Mr. Almond found moving his workers and equipment between the two parcels to be very expensive. He approached the ABC farming partnership, which owned 80 acres next to Mr. Almond's 120-acre parcel, about joining the partnership. Mr. Almond has a cost basis of $100,000 in his 80 acres. The fair market value of his 80 acres at the time of the proposed exchange was $400,000, and the fair market value of the ABC partnership's 80 acres was $350,000. In 2022, Mr. Almond transferred his 80 acres to the ABC partnership and received a $350,000 interest in the ABC partnership, plus $50,000 cash. What was the amount of Mr. Almond's recognized gain in 2022? A) $50,000B) $300,000C) $37,500D) No gain.

C) $37,500 A transfer of land for a partnership interest is tax free. However, when property other than a partnership interest is also distributed, the transaction is treated as part sale and part tax-free contribution. Mr. Almond is treated as having sold 1/8 of the property for $50,000 ($400,000 FMV of the property - $350,000 partnership interest received). One-eighth of his $100,000 cost basis is $12,500, so the recognized gain on the sale is $37,500 ($50,000 - $12,500). [1] [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: 120,000What amount of income from Classic should Garner include in her gross income for that year? A) $7,500B) $30,000C) $37,500D) $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]

Fact Pattern:Bole Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception and is not subject to the uniform capitalization rules. In 2022, Bole recorded the following:- Gross receipts: $50,000- Dividend income from investments: $5,000- Supplies expense: $2,000- Utilities expense: $1,500On Bole's 2022 S corporation Form Schedule K-1, Shareholders' Shares of Income, Credits, Deductions, etc., what amount of income should be separately stated from business income?A) $50,000B) $48,000C) $5,000D) $0

C) $5,000Separately stated items include (1) Sec. 1231 gains and losses, (2) net short-term capital gains and losses, (3) net long-term capital gains and losses, (4) dividends, (5) charitable contributions, (6) taxes paid to a foreign country or to a U.S. possession, (7) tax-exempt interest and related expense, (8) investment income and related expense, (9) amounts previously deducted, (10) real estate activities, (11) Sec. 179 deductions, (12) credits, and (13) any other item that could impact two shareholders differently. Therefore, only the $5,000 of dividend income is separately stated from business income.

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) $330,000B) $500,000C) $502,000D) $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 yearABC has no carryforwards from prior years. Given the information above, what is ABC's taxable income? A) $775,000B) $732,000C) $725,000D) $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 = $100,000Real estate:- Basis to Lex = $70,000- Fair Market Value = $96,000What is Vance's basis in the real estate? A) $96,000B) $83,000C) $80,000D) $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, $15,000B) Apartment house, $44,000; office building, $11,000C) Apartment house, $25,000; office building, $30,000D) 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]

Nevertoolate Corporation was established on January 1, Year 1. One hundred percent of the shareholders elected to adopt S status for the company and properly completed IRS Form 2553. However, the company's tax accountant did not file the form. On July 1, Year 1, the new accountant discovered the filing omission. Select the best available remedy for the corporation to elect S status from the following:A) File the Form 2553, as originally prepared, on or before the end of the first tax year of the corporation.B) Prepare a new Form 2553 and adopt a "short year" period for S status.C) File the original Form 2553, on or before the due date of the initial return and show cause as to why the election is being filed late.D) The company may file the prepared Form 2553; however, consent for S status will not be effective earlier than January 1, Year 2.

C) File the original Form 2553, on or before the due date of the initial return and show cause as to why the election is being filed late.All shareholders, at the time of the election, must file a consent by signing Form 2553. Elections made after the first 2 months and 15 days of the corporation's tax year will become effective on the first day of the following tax year. The IRS can treat a late-filed election as having been timely filed if a determination is made that reasonable cause existed for a corporation's failure to file the election in a timely manner.[1]

The S corporation status would terminate at the beginning of 2023 for which of the following? A) Incorporated in 1997. First year of S status was 2018. Passive investment income equaled 29% of gross receipts in 2020, 27% in 2021, and 25% in 2022. Subchapter C earnings and profits were $10,000 at the end of each year.B) Incorporated in 1997. First year of S status was 2018. Earnings and profits from C corporation tax years of $10,000. In 2020, passive investment income equaled 35% of gross receipts. The corporation had no passive investment income in prior or later years.C) Incorporated in 1999. First year of S status was 2019. Passive investment income equaled 27% of gross receipts in 2020, 26% in 2021, and 44% in 2022. Subchapter C earnings and profits were $10,000 at the end of each year.D) Incorporated in 1999. First year of S status was 2017. Passive investment income equaled 19% of gross receipts in 2020, 34% in 2021, and 35% in 2022.

C) Incorporated in 1999. First year of S status was 2019. Passive investment income equaled 27% of gross receipts in 2020, 26% in 2021, and 44% in 2022. Subchapter C earnings and profits were $10,000 at the end of each year. Sec. 1362(d)(3) provides that S corporation status will be terminated when passive investment income exceeds 25% of gross receipts for 3 consecutive taxable years, and the corporation has Subchapter C earnings and profits at the end of each year. This answer is the only one that meets both requirements.

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).

Which of the following statements about qualifying shareholders of an S corporation is correct? A) A general partnership may be a shareholder.B) Only individuals may be shareholders.C) Individuals, estates, and certain trusts may be shareholders.D) Nonresident aliens may be shareholders.

C) Individuals, estates, and certain trusts may be shareholders. Generally, only an individual, an estate, or a qualified trust can be a qualifying shareholder of an S corporation.

Don and Warren formed an equal partnership to build drag-racing vehicles. Don contributed $5,000 in cash, and Warren contributed a truck with a fair market value of $5,000 and an adjusted tax basis of $4,500. They plan to use the truck for hauling parts and cars. When Warren purchased the truck 1 year earlier, he elected to use the straight line method to depreciate the truck using the mid-year convention over its 5-year recovery period. The partnership should... A) Record the truck on the books at $5,000 and depreciate it using the allowable method and convention over a 5-year recovery period.B) Record the truck on the books at $5,000 and depreciate it over its remaining recovery period using the straight line method and mid-year convention.C) Record the truck on the books at $4,500 and depreciate it over its remaining recovery period using the straight line method and mid-year convention.D) Record the truck on the books at $4,500 and depreciate it using the allowable method and convention over a 5-year recovery period.

C) Record the truck on the books at $4,500 and depreciate it over its remaining recovery period using the straight line method and mid-year convention. The partnership's basis for contributed property is the same as the basis of the property transferred. Also, the holding period for the contributed property includes the transferor's holding period. Thus, the truck is recorded at $4,500 and depreciated over its remaining life.[1]

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date... A) The partner is admitted to the partnership. B) The partner transfers the asset to the partnership. C) The partner's holding period of the capital asset began. D) The partner is first credited with the proportionate share of partnership capital.

C) The partner's holding period of the capital asset began. The holding period of the partner's interest includes the holding period of contributed capital and Sec. 1231 assets. The holding period on an interest acquired in exchange for money, ordinary income property, or services begins the day after the exchange. [1]

All of the following events would cause an S corporation to cease qualifying as an S corporation except... A) Having more than 100 shareholders.B) Transferring its stock to a corporation.C) Transferring its stock to a resident alien.D) Revoking the election with the consent of shareholders who, at the time the revocation is made, hold 55% of the stock.

C) Transferring its stock to a resident alien. A resident alien is an individual who qualifies to be a shareholder of an S corporation. Therefore, the transfer of stock to a resident alien does not disqualify a corporation from S corporation status.

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) $1,000C) $8,000D) $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: $12,000Plus: 20% of the partnership liabilities: $10,000Less: Cash distribution: $(15,000)Plus: Distributive income share ($60,000 × 20%): $12,000= Adjusted basis 1/2/Yr 2: $19,000The capital gain is $11,000 and is calculated as follows:Cash proceeds: $20,000Liabilities assumed by the purchaser: $10,000= Amount realized: $30,000Less: Adjusted basis: $(19,000)= Capital gain: $11,000[1] [2]

Nolan designed Timber Partnership's new building. Nolan received an interest in the partnership for the services. Nolan's normal billing for these services would be $80,000, and the fair market value of the partnership interest Nolan received is $120,000. What amount of income should Nolan report? A) $0 B) $40,000 C) $80,000 D) $120,000

D) $120,000 A partner who receives a partnership capital interest in exchange for services recognizes compensation income equal to the FMV of the partnership capital interest. Gross income must be reported when an interest received is subject to neither substantial risk of forfeiture nor restrictions on transfer. The income reported is ordinary. [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) $30,000B) $36,000C) $12,000D) $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.

At December 31, 2021, Burns and Cooper were equal partners in a partnership with net assets having a tax basis and fair market value of $100,000. On January 1, 2022, Todd contributed securities with a fair market value of $50,000 (purchased in 2020 at a cost of $35,000) to become an equal partner in the new firm of Burns, Cooper, and Todd. The securities were sold on December 15, 2022, for $65,000. How much of the partnership's capital gain from the sale of these securities should be allocated to Todd? A) $5,000B) $10,000C) $15,000D) $20,000

D) $20,000 A special allocation for the difference between fair market value at the time of contribution and basis of contributed property is required. The gain attributable to the precontribution appreciation in the securities must be allocated entirely to Todd, and the gain attributable to postcontribution appreciation should be shared equally by Burns, Cooper, and Todd. Todd's share is:- Precontribution gain ($50,000 FMV - $35,000 basis): $15,000- Plus 1/3 of postcontribution gain ($65,000 proceeds - $50,000 1/1/2022 FMV): $5,000= Todd's share of the capital gain: $20,000[1] [2]

On January 2, 2022, Arch and Bean contribute cash equally to form the JK Partnership. Arch and Bean share profits and losses in a ratio of 75% to 25%, respectively. For 2022, the partnership's ordinary income was $40,000. A distribution of $5,000 was made to Arch during 2022. What is Arch's share of taxable income for 2022? A) $5,000B) $10,000C) $20,000D) $30,000

D) $30,000 Arch's 75% share of the partnership's $40,000 ordinary income, or $30,000, is Arch's share of taxable income for 2022 even if not distributed. Distributions are received free of tax by the partner, provided (s)he has adequate basis in the partnership, i.e., at least as much basis as the distribution. A partner's basis is increased by his or her share of partnership income and decreased by distributions.

Ben Krug, sole proprietor of Krug Dairy, hired Jan in 2016 for an agreed salary and the promise of a 10% partnership capital interest if Jan continued in Krug's employ until the end of 2021. On January 1, 2022, when the net worth of the business was $300,000, the partnership was formed as agreed. On what amount will Jan have to pay tax in 2022 for the partnership capital interest she received? A) $0 B) $12,000 C) $18,000 D) $30,000

D) $30,000 Ordinary income is recognized if services are rendered in return for property. But Jan did not perform services for a partnership. She worked for a sole proprietor in exchange for an interest in a new partnership. The transaction is treated as if Jan received an undivided 10% interest in each of the enterprise's assets and then contributed them to the partnership. The partnership's basis in the assets deemed contributed by Jan is their FMV. Jan recognizes income of 10% of the $300,000 net worth of the enterprise, or $30,000. [1] [2]

Graphite Corp. has been a calendar-year S corporation since its inception on January 2, 2014. On January 1, 2022, Smith and Tyler each owned 50% of the Graphite stock in which their respective bases were $12,000 and $9,000. For the year ended December 31, 2022, Graphite had $80,000 in ordinary business income and $6,000 in tax-exempt income. Graphite made a $53,000 cash distribution to each shareholder on December 31, 2022. What total amount of income from Graphite is includible in Smith's 2022 adjusted gross income?A) $96,000B) $93,000C) $43,000D) $40,000

D) $40,000All of an S corporation's income is taxed to the shareholders each year, whether distributed or not. Each shareholder's basis is increased by his or her share of income, including tax-exempt income. Distributions in general then reduce the shareholder's basis, and any distribution that is not in excess of basis is treated as a tax-free return of capital. Therefore, Smith will recognize $40,000 of ordinary income ($80,000 × 50% interest). The tax-exempt income is not included in a shareholder's income. The distribution does not affect Smith's gross income because it does not exceed his basis ($12,000 basis + $43,000 income).[1] [2]

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) $35,000B) $52,500C) $56,250D) $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) $0B) $1,500C) $4,500D) $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]

Lane, Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year. Mill is a 10% shareholder-employee in Lane. On Mill's behalf, Lane pays Mill's family coverage under the health insurance plan. What amount of insurance premiums is includible in Mill's gross income?A) $0B) $720C) $4,800D) $7,200

D) $7,200Certain fringe benefits received by shareholders owning more than 2% of the stock of an S corporation are included in the shareholder's W-2. Health insurance premiums are not a tax-free benefit to shareholders holding more than 2%.[1]

Separately stated items were incorrectly included in ordinary income for REX partnership. Of the revenue items listed, what is the total amount of partnership items that must be separately stated?- Dividend income: $5,000- Investment income: $17,000- Ordinary income from other partnerships: $29,000- Tax-exempt income: $32,000- Net farm profit: $44,000- Royalties: $11,000- Cancellation of debt: $20,000 A) $65,000B) $118,000C) $97,000D) $85,000

D) $85,000 Each partnership item of income, gain, deduction, loss, or credit that may vary the tax liability of any partner must be separately stated. Separately stated items include dividend income, investment income, tax-exempt income, royalties, and cancellation of debt. Therefore, the total amount of separately stated items is $85,000 ($5,000 + $17,000 + $32,000 + $11,000 + $20,000).[1] [2]

Which of the following should be used in computing the basis of a partner's interest acquired from another partner? 1. Cash Paid by Transferee to Transferor 2. Transferee's Share of Partnership Liabilities A) 1. No: 2. Yes B) 1. Yes: 2. No C) 1. No: 2. No D) 1. Yes: 2. Yes

D) 1. Yes: 2. Yes The purchasing partner's basis in his or her partnership interest is its cost basis. It includes both cash paid the seller and the purchaser's allocable share of partnership liabilities. But the partnership's basis in partnership property is not adjusted when a partnership interest is transferred unless a Sec. 754 election is in effect. [2]

A shareholder's basis in the stock of an S corporation is increased by the shareholder's pro rata share of income from...1. Tax-Exempt Interest2. Taxable InterestA) 1. No: 2. NoB) 1. No: 2. YesC) 1. Yes: 2. NoD) 1. Yes: 2. Yes

D) 1. Yes: 2. YesInterest income received by an S corporation, whether taxable or nontaxable, increases the basis of an S corporation shareholder's stock.

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 = $26,667B) 2022 = $20,000: 2023 = $20,000C) 2022 = $40,000: 2023 = $0D) 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]

Bristol Corp. was formed as a C corporation on January 1, 1985, and elected S corporation status on January 1, 1991. At the time of the election, Bristol had accumulated C corporation earnings and profits that have not been distributed. Bristol has had the same 25 shareholders throughout its existence. In 2022, Bristol's S election will terminate if it... A) Increases the number of shareholders to 50.B) Adds a decedent's estate as a shareholder to the existing shareholders.C) Takes a charitable contribution deduction.D) Has passive investment income exceeding 90% of gross receipts in each of the 3 consecutive years ending December 31, 2022.

D) Has passive investment income exceeding 90% of gross receipts in each of the 3 consecutive years ending December 31, 2022. An S corporation's status will terminate if (1) it has C corporation earnings and profits at the close of 3 consecutive years, and (2) during those 3 years, over 25% of the gross receipts of the S corporation was due to passive investment income. First, the existence of the undistributed earnings and profits satisfies the first test. Second, with 90% passive investment income within the gross receipts, the termination is effective.[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.

On February 10, 2022, Ace Corp., a calendar-year corporation, elected S corporation status, and all shareholders consented to the election. There was no change in shareholders in 2022. Ace met all eligibility requirements for S status during the pre-election portion of the year. What is the earliest date on which Ace can be recognized as an S corporation? A) February 10, 2022.B) February 10, 2023.C) January 1, 2023.D) January 1, 2022.

D) January 1, 2022. The S corporation election can be effective for the current tax year if it is made on or before March 15 for calendar-year corporations, subject to certain exceptions relating to ineligibility and complete consent. Since this election was made on February 10 and no exceptions applied, the election can be effective for the entire taxable year in which it was made.

At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black recognizes a gain if...I. The fair market value of the contributed property exceeds its adjusted basis.II. The property is encumbered by a mortgage with a balance of $100,000. A) I only. B) II only. C) Both I and II. D) Neither I nor II.

D) Neither I nor II. A partner will generally not recognize income upon contribution of property to a partnership. This is true when the fair market value of the contributed property exceeds the adjusted basis. No gain is recognized when the contributed property is subject to a mortgage unless the liability assumed by the partnership exceeds the partner's basis in the partnership. In the second situation, Black is treated as contributing $250,000 and receiving a cash distribution of $50,000 (50% of the $100,000 liability). Since this does not exceed Black's basis, no gain is recognized. [1]

Lindal Corporation, organized in 2022, immediately filed an election for S corporation status under the rules of Subchapter S. What is the maximum amount of passive investment income that Lindal will be allowed to earn and still qualify as an S corporation? A) 80% of gross receipts.B) 50% of gross receipts.C) 20% of gross receipts.D) No limit on passive investment income.

D) No limit on passive investment income. There is no limit on the amount of passive investment income that a corporation can earn and still qualify as an S corporation. S corporation status is terminated if the corporation has had passive investment income in excess of 25% of gross receipts for 3 consecutive taxable years and has had Subchapter C earnings and profits at the end of each of those taxable years. Subchapter C earnings and profits are those accumulated during a taxable year for which a Subchapter S election was not in effect. Lindal filed an S election immediately after formation, which prevents C corporation earnings and profits.[1]

When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale? A) Each partner reports a capital gain of $33,333.B) The entire gain of $100,000 must be specifically allocated to Acre.C) The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.D) The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

D) The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership. When determining the gain or loss allocable to each partner, you must first allocate any precontribution gain or loss (gain or loss that existed in the asset at the time it was contributed to the partnership but went unrecognized) to the contributing partner, followed by their proportionate share of the gain or loss. In this case, Acre contributed land with a built-in $40,000 gain ($100,000 FMV - $60,000 adjusted basis). Upon disposition, the partnership realizes a gain of $100,000 ($160,000 amount realized - $60,000 carryover basis). Of this gain, $40,000 is allocated to Acre as precontribution gain. The remaining gain of $60,000 is shared equally among the partners per the partnership agreement. Thus, Acre reports a total gain of $60,000 [$40,000 precontribution gain + ($60,000 remaining gain ÷ 3)] and the other two partners each report a gain of $20,000 ($60,000 remaining gain ÷ 3).