ACCT 375 Final

Question 1

What is a sole proprietorship?
How is income from a sole proprietorship reported?

Answer 1

Definition- Unincorporated business with a single owner, owner is an individual.

Reported- on an individual tax form, mixed in with the individual’s other income. no basis in business just basis in asset. No dividend. BUSINESS IS OWNER. no legal liability protections.

Question 2

What is a partnership?

Answer 2

Created by drafting an agreement between the partners that outlines the parameters of their business arrangement.

States the rights and obligations of partners, and the % of profits and losses allocable to each partner.
No legal protection- partners are on the hook individually.

Question 3

Guaranteed Payments:
What is it?
Does the partnership get to deduct the guaranteed payment?

Answer 3

Guaranteed payments are used in place of paying partner salary ( a partner cannot be an employee and get a salary).

Yes, they are deductable the same as the salary, just on a different line of the tax form. Reduce ordinary income for partnership, so it reduces ordinary income.

Question 4

Partnership and Self-Employment Tax:
SE tax must be paid by general partners on

Answer 4

Guaranteed payments and share of the partnership’s ordinary income.

Question 5

Adjusted basis in partnership interest:

Answer 5

A partner’s tax basis in their partnership interest is adjusted annually to reflect share of partnership activity and changes in investment.

Question 6

Partnership Variations:
Limited Partnership
Limited Liability Partnership (LLP)
Limited Liability Company (LLC)

Answer 6

Limited Partnership- designed to facilitate passive investment, less risk. Two kinds of partners- general and limited (designated). There must be at least 1 general partner. NO SE TAX
limited partner- cannot participate in company-
working/managing,etc. you are only on the hook for the
Investment if you are a limited partner.

LLP- generally used by professional service organizations, law firms, acct. firms, etc. shield from malpractice liability of partner.

LLC- taxed like a partnership, but entity is like a corporation. protected from liability.

Question 7

Shareholder basis:
how to compute the initial basis?

Answer 7

initial basis=cash+adj. basis property
what about debt?-not included in corporations

similar to partnerships, basis is…

increased by contributions and income/gain items
and decreased by distributions and loss items.
Adj. basis:
Beg. Basis
+ contributions +positive income items or gains
- distributions - negative income items or losses
= adjusted basis

Question 8

S Corporation Operation:

Answer 8

Shareholders can be paid a salary (i.e. are employees)

So, how are allocated income and loss treated for the shareholder?
loss deduction subject to basis limitations.
But can also use loan basis to deduct loss (Notes receivable for
shareholder- doesn’t affect basis).
No SE tax on share of ordinary income!!!