CH 16 Business Entity Selection and Taxation Flashcards
Not all entities are separate legal entities for the purposes of taxation
. a. True b. False
. a. True
“Piercing the veil” may occur if business owners fail to keep their personal records with their business records.
a. True b. False
b. False
Sole proprietorships are never required to register with the state in which they do business.
a. True b. False
b. False
One of the major disadvantages of a sole proprietorship is the potential legal liability.
a. True b. False
a. True
The ordinary and necessary expenses of a sole proprietorship are reported on Schedule C of the owner’s Form 1040.
a. True b. False
a. True
General partnerships are governed by federal law.
a. True b. False
b. False
The owners of a general partnership have limited liability from the debts and obligations of the partnership.
a. True b. False
b. False
General partnerships are pass-through entities for tax purposes.
a. True b. False
a. True
Limited partnerships are generally required to register with the state.
a. True b. False
a. True
Limited partnerships offer limited liability for all partners.
a. True b. False
b. False
Limited liability partnerships are generally owned by licensed professionals.
a. True b. False
a. True
The transferability of an interest in an LLP is the same as for any other type of partnership
. a. True b. False
b. False
Only a limited partner can manage a family limited partnership.
a. True b. False
b. False
At formation of a family limited partnership, the founder is subject to gift tax on the transfer of the property interest to the family limited partnership.
a. True b. False
b. False
There is no limitation on the number of members of a LLC.
a. True b. False
a. True
A written operating agreement is an important element of the management of a LLC.
a. True b. False
a. True
A corporation’s purpose must be narrowly defined in the articles of incorporation.
a. True b. False
b. False
In-kind distributions of appreciated assets by a C corporation are treated as a deemed sale by the corporation.
a. True b. False
a. True
The number of S corporation shareholders is limited to 100.
a. True b. False
a. True
All payments from an S corporation to an S corporation shareholder will be treated as income subject to payroll taxes.
a. True b. False
b. False
Doralee, an architect, performed services for Judy and Violet and, in lieu of her normal fee, accepted a 10 percent interest in a partnership with a fair market value of $10,000. How much income from this arrangement should Doralee report on her income tax return?
a. Doralee does not have any currently taxable income.
b. Doralee has realized $10,000 in capital gains.
c. Doralee must recognize $10,000 in compensation income.
d. Doralee has realized $10,000 in compensation income, but does not have to recognize it until she sells her interest in the partnership.
The correct answer is c.
If a partner contributes services in exchange for a partnership interest, the partner must recognize ordinary compensation income for the value of the services.
In this case, Doralee must currently recognize $10,000 of compensation income
An S corporation has the following information for the taxable year:
Net Income (before the items below) $90,000 Warner’s Salary
Other Income Other Expenses
Net Income
($38,000) $29,000
($14,000) $67,000
Warner is a 20 percent owner of the S corporation and he performs services for the business as an employee. What is Warner’s self-employment income?
a. $0.
b. $52,000.
c. $67,000.
d. $90,000.
The correct answer is a.
None of the income from the S corporation (distributed or undistributed) is self-employment income to
Warner.
Income from an S corporation is not considered self-employment income as long as the employee/owner’s compensation is reasonable
On August 1, 2023, Elle bought a five percent interest (5 shares) in XYZ, an S corporation that files as a calendar-year taxpayer. In 2023, the S corporation income was $160,000.
How much will be reported to Elle on her 2023 1120-S Schedule K-1?
a. $0.
b. $3,333.
c. $3,353.
d. $8,000.
correct answer is c.
$160,000 x 5% x 153/365 = $3,353.
From August 1 to December 31 is 153 days.
At the beginning of the current year, Emmett’s basis in his partnership interest was $100,000. At the end of the year, Emmett received a K-1 from the partnership that showed the following information:
Cash Withdrawn $31,000
Partnership Taxable Income $60,000
Charitable Contribution $1,000
What is Emmett’s basis in his partnership interest at year-end?
a. $128,000.
b. $129,000.
c. $159,000.
d. $160,000.
a. $128,000.
Basis at beginning of current year $100,000
Increases to Basis:
Partnership Taxable Income $60,000
Decreases to Basis:
Cash Withdrawn ($31,000)
Charitable Contribution ($1,000)
Basis at Year-End $128,000