Question 1

A sole proprietor may deduct investment interest and investment expense without limitations if investments are made in the name of the business.

Accepted Answer

A sole proprietor may deduct investment interest and investment expenses, but only to the extent of investment income earned by the business. There are limitations on the amount that can be deducted, and investments must be made in the name of the sole proprietor, not the business.

Question 2

If a sole proprietorship has a net operating loss for the current period, the loss can only be used to offset other business income in the current year. Any current loss can be carried back three years and forward five years and used to offset business income in those years.

Accepted Answer

For sole proprietorships, a net operating loss can be used to offset both business and non-business income. It can also be carried back to the two preceding years to generate a refund and carried forward up to 20 years to offset future income, not just limited to three years back and five years forward.

Question 3

When a partnership distributes property that has a fair market value greater than its basis, the partnership must recognize the income as if it sold the property.

Accepted Answer

False

Question 4

A corporation may reduce trade or business income by a charitable contributions made by the corporation, but the deduction is limited to 10% of taxable income, as adjusted..

Accepted Answer

According to the Internal Revenue Code, a corporation may deduct charitable contributions from its trade or business income, but the deduction is limited to 10% of the corporation's taxable income, as adjusted.

Question 5

Withdrawals of cash by a partner are taxable.

Accepted Answer

Withdrawals of cash by a partner are not taxable as they are considered a return of capital investment. Only profits and losses from the partnership are taxable to the partners.

Question 6

At the beginning of the current year, Harrison's adjusted basis in FLM Partnership is $50,000. During the year, Harrison receives a cash distribution of $25,000. How much income must Harrison recognize because of the cash received?
A) $- 0 -
B) $10,000
C) $15,000
D) $20,000
E) $25,000

Accepted Answer

Harrison must recognize $0 in income from the cash distribution because cash distributions from a partnership to a partner are generally not taxable as long as the distribution does not exceed the partner's adjusted basis in the partnership. Since Harrison's adjusted basis is $50,000 and the distribution is $25,000, it does not exceed his basis, thus no income is recognized.

Question 7

Although nontaxable income and nondeductible expenditures are not included in the computation of taxable income, they do affect the shareholder's basis in their S corporation stock.

Accepted Answer

Nontaxable income and nondeductible expenditures affect the shareholder's basis in their S corporation stock, even though they are not included in the calculation of taxable income. This basis is important for determining the tax consequences of distributions and sales of the stock.

Question 8

Luisa, Lois, and Lucy operate a boutique named Mariabelle's Dreams. Based on advice from Luisa's sister, an accountant, the three form a partnership. Luisa owns 40% and Lois and Lucy each own 30%. For the year, Mariabelle's Dreams reports the following:  What amount will Mariabelle's Dreams report to Luisa as her ordinary income from the partnership?
A) $54,000
B) $54,400
C) $54,800
D) $55,600
E) $ 56,000

Accepted Answer

The answer of Luisa, Lois, and Lucy operate a boutique...

Question 9

Since Wisher, Inc. owns 80% of Patriot, Inc. a U.S. corporation) the dividend received deduction rate is 100%.

Accepted Answer

If a U.S. corporation owns more than 80% of another U.S. corporation's stock, it is eligible for a 100% dividend received deduction.

Question 10

When a partner receives a cash distribution from a partnership, the distribution is never taxable even if the amount of cash received is greater than the partner's basis in the partnership.

Accepted Answer

When a partner receives a cash distribution from a partnership, the distribution may be taxable if the amount of cash received is greater than the partner's basis in the partnership. This is known as a "distribution in excess of basis" and is treated as a taxable gain to the partner.

Question 11

A family entity combines the tax-planning aspects of the progressive tax rate structure with the use of the owner's family to minimize the overall tax liability of the entire family.

Accepted Answer

A family entity, such as a family partnership or limited liability company, can help to reduce overall tax liability by distributing income and deductions among family members in a strategic manner to take advantage of the progressive tax rate structure. By doing so, the family can potentially lower their combined tax bracket and keep more of their income.

Question 12

Joline operates Adventure Tours as a sole proprietorship. For the year, Adventure Tours has the following income and expense items:  If Joline has other income of $6,000, what is her adjusted gross income?
A) $141,000
B) $142,000
C) $143,000
D) $146,000

Accepted Answer

The answer of Joline operates Adventure Tours as a sole...

Question 13

Which of the following items are included in the computation of the sole proprietorship's taxable income? I. Charitable contributions. II. Section 1231 gains and losses. III. Investment income and expenses.
A) Only statement I is correct.
B) Only statement II is correct.
C) Statements I, II, and III are correct.
D) Only statement III is correct.
E) None are correct.

Accepted Answer

The answer of Which of the following items are included...

Question 14

A partner's basis is increased by the amount of deductible loss that flows through from the partnership.

Accepted Answer

A partner's basis is decreased by the amount of deductible loss that flows through from the partnership, as losses reduce the partner's investment in the partnership.

Question 15

With the exception of personal service and closely-held corporations, regular corporations are not subject to the passive activity rules.

Accepted Answer

The answer of With the exception of personal service and...

Question 16

Corporations that sell depreciable real property are not subject to depreciation recapture rules

Accepted Answer

Corporations that sell depreciable real property are subject to depreciation recapture rules, which require the excess of the depreciation taken over the actual gain to be taxed as ordinary income.

Question 17

The amount of the dividend on a nonliquidating corporate distribution of property is the fair falue of the property.

Accepted Answer

The amount of the dividend on a nonliquidating corporate distribution of property is generally equal to the fair value of the property. This is because the distribution is treated as if the property was sold and the proceeds were distributed as a dividend. However, there are some exceptions and special rules that may apply in certain situations.

Question 18

Martin and Joe are equal partners in Ferrell Company. For the current year, Ferrell Company reports the following items of income and expense:  In addition to his Ferrell Company earnings, Martin has other income of $35,000. Included in the $35,000 is a $10,000 loss from the sale of land held as an investment. Martin's adjusted gross income is:
A) $162,000
B) $167,000
C) $172,000
D) $187,000
E) $192,000

Accepted Answer

The answer of Martin and Joe are equal partners in...

Question 19

Sales of property between a partner who owns more than 50% of a partnership's interest and the partnership are subject to the related party rules.

Accepted Answer

Sales between related parties, such as a partner who owns more than 50% of a partnership's interest and the partnership, are subject to related party rules to prevent tax avoidance. These rules impose additional requirements and restrictions on the transaction to ensure that it is conducted at arm's length and reflects fair market value.

Question 20

When a corporation pays a dividend, it is nontaxable if it is in excess of earnings and profits.

Accepted Answer

The answer of When a corporation pays a dividend, it...

Quiz 14: Choice of Business Entity-Operations and Distributions