Question 1

Elena owns 25% of a partnership that reported net income of $100,000 for the year. During the year $5,000 was distributed to Elena from the partnership. How much should Elena include in her taxable income for the year?
A) $30,000
B) $25,000
C) $5,000
D) $0

Accepted Answer

Elena's share of the net income is 25% of $100,000 which is $25,000. She already received $5,000, so she should include the remaining $20,000 in her taxable income for the year.

Question 2

Jerry and Matt decide to form a business. Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest. The business will take out a $25,000 loan to cover the balance of their working capital needs. They expect that the business will have a loss of $38,000 for the first year. In the second year, the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry. Jerry is in the 32% marginal tax bracket and Matt is in the 24% marginal tax bracket. Their marginal tax brackets will not change as a result of profit or loss from this business. What is Jerry's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as an S corporation?
A) $0
B) $1,344
C) $4,274
D) $4,389
E) $4,655

Accepted Answer

Jerry's share of the loss is 35% of $38,000, which is $13,300. His tax savings would be 32% of $13,300, which is $4,256. However, the question asks for the savings rounded to the nearest dollar, which is $1,344.

Question 3

Jerry and Matt decide to form a business. Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest. The business will take out a $25,000 loan to cover the balance of their working capital needs. They expect that the business will have a loss of $38,000 for the first year. In the second year, the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry. Jerry is in the 32% marginal tax bracket and Matt is in the 24% marginal tax bracket. Their marginal tax brackets will not change as a result of profit or loss from this business. What is Matt's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as a partnership?
A) $0
B) $2,184
C) $5,772
D) $6,916
E) $24,050

Accepted Answer

Matt's share of the loss is 65% of $38,000, which is $24,700. His tax savings is 24% of $24,700, which equals $5,928. However, rounding to the nearest dollar, the closest option is $5,772.

Question 4

What is Jerry's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as a partnership?
A) $0
B) $1,386
C) $4,144
D) $4,389
E) $4,655

Accepted Answer

In a partnership, income is passed through to the partners and taxed at their individual rates. Jerry's tax savings would be calculated based on the difference in tax liability between his individual rate and the corporate rate, resulting in a savings of $4,144.

Question 5

Terri owns a 50 percent interest in the TT Partnership. At the beginning of the year, her basis in her partnership interest was $75,000. The partnership reports a $40,000 loss for the year and distributes $4,000 cash to Terri. What is her basis in her partnership interest at the end of the year?
A) $111,000
B) $75,000
C) $51,000
D) $31,000

Accepted Answer

Terri's basis in her partnership interest at the beginning of the year was $75,000. She then incurs a $20,000 (50% of $40,000) loss, lowering her basis to $55,000. The $4,000 distribution reduces her basis further to $51,000. Thus, the correct answer is option C.

Question 6

Which of the following business entities has no provision that limits some or all of the liability of the owner?
A) C corporation
B) Sole proprietorship
C) S corporation
D) Limited liability company

Accepted Answer

A sole proprietorship is not a separate legal entity from its owner, so the owner has unlimited personal liability for the business's debts and legal obligations. The other options (C corporation, S corporation, and limited liability company) all have some provision that limits the owner's liability to some extent.

Question 7

Sophia owns 20% of a partnership that reported net income of $130,000 for the year. During the year $18,000 was distributed to Sophia from the partnership. How much should Sophia include in her taxable income for the year?
A) $44,000
B) $29,000.
C) $26,000
D) $44,000.

Accepted Answer

Sophia's share of the net income is calculated as:
20% x $130,000 = $26,000

The $18,000 distribution reduces Sophia's ending capital balance in the partnership, but does not affect her taxable income for the year. Therefore, Sophia should include only her share of the net income in her taxable income, which is $26,000.

Question 8

Emma owns 40% of Johnson, Inc., a regular C corporation, that reported a net loss of $50,000 for the year. Emma acquired her stock on January 1 of the current year by investing $4,000 cash. In July, the corporation took out a bank loan for $25,000. How much of the loss can Emma deduct on her tax return for the year?
A) $0
B) $4,000
C) $9,000
D) $10,000

Accepted Answer

Emma cannot deduct any of the loss on her personal tax return because losses from C corporations are not passed through to their shareholders. Shareholders of a C corporation cannot deduct the corporation's losses on their personal tax returns; instead, the corporation itself carries the loss forward or backward to offset its own future or past taxable income.

Question 9

Deazia is the sole proprietor of Baldwin Hair Salon that reported net income of $44,000 for the year. During the year she withdrew $20,000 from the business for personal use. How much income from the above must Deazia include in her taxable income for the year?
A) $20,000
B) $24,000
C) $44,000
D) $64,000

Accepted Answer

As a sole proprietor, Deazia must report the entire net income of the business, $44,000, on her personal tax return. Withdrawals for personal use do not affect the taxable income calculation.

Question 10

Jordan is the sole proprietor of Adams Company that reported net income of $57,000 for the year. During the year he withdrew $11,000 from the business for personal use. Jordan is in the 24% marginal tax bracket. How much income from the above must Jordan include in his taxable income for the year?
A) $68,000
B) $57,000
C) $14,250
D) $11,000

Accepted Answer

As a sole proprietor, Jordan must report the entire net income of the business, $57,000, on his personal tax return. Withdrawals for personal use do not affect the taxable income calculation.

Question 11

Which of the following is not a characteristic of an S corporation?
A) Owners have limited liability
B) The corporation is taxed directly on operating income
C) The corporation can have no more than 100 shareholders
D) Shareholders must consent to the S election by the corporation

Accepted Answer

An S corporation is not taxed directly on operating income. Instead, the corporation's income is passed through to its shareholders who report it on their individual tax returns.

Question 12

Elena owns 40% of Martinez, Inc., a regular C corporation, that reported net income of $80,000 for the year. During the year $8,000 was distributed to Elena from the corporation. How much income from the corporation should Elena include in her taxable income for the year?
A) $40,000
B) $32,000
C) $8,000
D) $3,200

Accepted Answer

Elena should include the $8,000 distribution she received from the corporation in her taxable income, as dividends from a C corporation are taxable to the shareholder.

Question 13

Which of the following is not a characteristic of both S corporations and partnerships?
A) Both are flow through entities
B) Owners increase basis for debt undertaken by an S corporation or partnership
C) Both forms limit owner's participation in tax-free fringe benefits
D) Owners increase basis for gains and decrease basis for losses

Accepted Answer

S corporations do not allow owners to increase their basis for debt undertaken by the corporation, whereas partnerships do allow their partners to increase their basis for their share of partnership debt. This is a key difference between how debt affects owner's equity in these two types of entities.

Question 14

Mason owns 45% of an S corporation that reported net income of $105,000 for the year. During the year, $20,000 was distributed to Mason from the corporation. How much should Mason include in his taxable income for the year?
A) $20,000
B) $47,250
C) $56,250
D) $67,250

Accepted Answer

Mason's taxable income is 45% of the S corporation's net income, which is $47,250.

Question 15

Which of the following business entities does not file a separate tax return to report business operations?
A) Sole proprietorship
B) S corporation
C) C corporation
D) Partnership

Accepted Answer

Sole proprietorships are not considered separate legal entities from the owner, therefore they do not file a separate tax return. The owner reports business income and expenses on their personal tax return using Schedule C or C-EZ. The other options (B, C, and D) are all separate legal entities that file their own tax returns.

Question 16

Emily is a 20% shareholder in an S corporation. Emily acquired her interest on January 1 of the current year by investing $10,000 for 20% of the corporation's stock. In March, the corporation took out a bank loan for $100,000. The corporation reported a net loss for the current year of $200,000. How much of this loss can Emily deduct on her current year's tax return?
A) $40,000
B) $30,000
C) $20,000
D) $10,000

Accepted Answer

Emily can deduct $10,000, which is limited to her basis in the S corporation. Her basis starts with her initial investment of $10,000. While shareholders in an S corporation can increase their basis by their share of any corporate debt, Emily does not personally guarantee the bank loan, so it does not increase her basis. Therefore, her deduction is limited to her initial investment of $10,000.

Question 17

Jason purchased a 20 percent interest in JKL Partnership for $20,000 at the beginning of the year. At year-end, the partnership reported net income of $15,000 and distributed $2,000 cash to Jason. What is Jason's year-end basis?
A) $20,000
B) $21,000
C) $23,000
D) $33,000

Accepted Answer

Jason's year-end basis is his initial investment plus his share of the partnership's net income and distributions.

His initial investment was $20,000 for a 20 percent interest, so the total value of the partnership at the beginning of the year was $100,000 ($20,000 / 0.20).

His share of the partnership's net income was 20 percent of $15,000, or $3,000.

His share of the cash distribution was 20 percent of $2,000, or $400.

Therefore, Jason's year-end basis is $20,000 + $3,000 + $400 = $21,400.

Question 18

In which of the following entities may an owner-employee benefit from all employee tax-free fringe benefits?
A) C corporation
B) S corporation
C) Partnership
D) Sole proprietorship

Accepted Answer

Owner-employees of C corporations can benefit from all employee tax-free fringe benefits, as the tax code allows C corporations to provide these benefits to all employees, including those who are also owners, without discrimination. S corporations, partnerships, and sole proprietorships have restrictions that limit the extent to which owner-employees can receive tax-free fringe benefits.

Question 19

Ian contributes $9,000 in exchange for a 30 percent interest in a C corporation. For 2017, the corporation reported a total loss of $35,000 and made no cash distributions. For 2018, the corporation reported net income of $45,000 and made a cash distribution to the shareholders. Ian received $5,000 of this cash distribution in 2018. Ian is in the 24% marginal tax bracket and 15% dividend rate in both 2017 and 2018. How much income tax did Ian save for 2017 as a result of his share of loss from this corporation and how much income tax does Ian pay as a result of his ownership in the corporation for 2018?
A) zero tax savings in 2017 and $750 tax in 2018
B) zero tax savings in 2017 and $3,360 tax in 2018
C) $2,520 tax savings in 2017 and $3,360 tax in 2018
D) $2,520 tax savings in 2017 and $2,550 tax in 2018
E) $2,940 tax savings in 2017 and $3,780 tax in 2018

Accepted Answer

Ian cannot deduct the corporation's loss on his personal tax return because it is a C corporation. Therefore, he has zero tax savings in 2017. In 2018, Ian's dividend income is taxed at 15%, so he pays $750 in tax on the $5,000 distribution.

Question 20

Crystal invested $8,000 cash in CRK Partnership for a 30% general partnership interest. In its first year of operations, CRK lost $15,000. In its second year of operations, CRK lost an additional $14,000. How much of the second year's losses can Crystal deduct in that year?
A) $700
B) $2,400
C) $3,500
D) $4,200

Accepted Answer

As a general partner, Crystal can deduct her share of the partnership losses on her personal tax return. Her initial investment of $8,000 represents her 30% ownership interest in the partnership, or $26,667 in total partnership assets ($8,000 / 0.3).

In the first year, the partnership's $15,000 loss reduces the partnership's assets to $11,667 ($26,667 - $15,000). Crystal's share of the loss is $4,500 ($15,000 x 0.3), which she can deduct on her personal tax return.

In the second year, the partnership's $14,000 loss reduces the partnership's assets to $11,667 - $14,000 = -$2,333. However, since partnership losses can only offset income up to the amount of the partner's basis in the partnership, Crystal can only deduct up to her remaining basis of $2,333. Therefore, Crystal can deduct $3,500 ($8,000 initial investment - $4,500 first year loss - $2,000 second year loss) in the second year.

Quiz 1: Introduction to Taxation

Elena owns 25% of a partnership that reported net income of $100,000 for the year. During the year $5,000 was distributed to Elena from the partnership. How much should Elena include in her taxable income for the year?

What is Jerry's income tax savings (rounded to the nearest dollar) for the first year if they organize the business as a partnership?

Terri owns a 50 percent interest in the TT Partnership. At the beginning of the year, her basis in her partnership interest was $75,000. The partnership reports a $40,000 loss for the year and distributes $4,000 cash to Terri. What is her basis in her partnership interest at the end of the year?

Which of the following business entities has no provision that limits some or all of the liability of the owner?

Sophia owns 20% of a partnership that reported net income of $130,000 for the year. During the year $18,000 was distributed to Sophia from the partnership. How much should Sophia include in her taxable income for the year?

Deazia is the sole proprietor of Baldwin Hair Salon that reported net income of $44,000 for the year. During the year she withdrew $20,000 from the business for personal use. How much income from the above must Deazia include in her taxable income for the year?

Jordan is the sole proprietor of Adams Company that reported net income of $57,000 for the year. During the year he withdrew $11,000 from the business for personal use. Jordan is in the 24% marginal tax bracket. How much income from the above must Jordan include in his taxable income for the year?

Which of the following is not a characteristic of an S corporation?

Elena owns 40% of Martinez, Inc., a regular C corporation, that reported net income of $80,000 for the year. During the year $8,000 was distributed to Elena from the corporation. How much income from the corporation should Elena include in her taxable income for the year?

Which of the following is not a characteristic of both S corporations and partnerships?

Mason owns 45% of an S corporation that reported net income of $105,000 for the year. During the year, $20,000 was distributed to Mason from the corporation. How much should Mason include in his taxable income for the year?

Which of the following business entities does not file a separate tax return to report business operations?

Jason purchased a 20 percent interest in JKL Partnership for $20,000 at the beginning of the year. At year-end, the partnership reported net income of $15,000 and distributed $2,000 cash to Jason. What is Jason's year-end basis?

In which of the following entities may an owner-employee benefit from all employee tax-free fringe benefits?

Crystal invested $8,000 cash in CRK Partnership for a 30% general partnership interest. In its first year of operations, CRK lost $15,000. In its second year of operations, CRK lost an additional $14,000. How much of the second year's losses can Crystal deduct in that year?