Chaper 10 - Sole Proprietorships, Partnerships, LLCs, and S Corporations.

Question 1

Define Distributive Share

Answer 1

A partner’s share of any item of income, gain, deduction, loss, or credit recognized by the partnership. Distributive shares are usually expressed as a percentage and specified in the partnership agreement.

Question 2

Define Employee Payroll Tax

Answer 2

The FICA tax (SS & Medicare) levied on employees who receive compensation during the year.

Question 3

Define Employer Identification Number

Answer 3

A number assigned to an employer by the IRS to identify the employer for employment tax purposes.

Question 4

Define Employer Payroll Tax

Answer 4

The FICA tax levied on employers that pay compensation during the year.

Question 5

Define General Partnership

Answer 5

A partnership in which all the partners have unlimited personal liability for the debts incurred by the partnership.

Question 6

Define Guaranteed Payment

Answer 6

A distribution from a partnership to a partner to compensate the partner for ongoing services performed for the partnership. Similar to an employee’s salary, they are deducted from income.

Question 7

Define Limited Liability Company.

Answer 7

A form of unincorporated business organization in which the members have limited liability for business debt. LLC’s are generally treated as partnerships for federal tax purposes.

Question 8

Define Limited Liability Partnership

Answer 8

A partnership in which general partners are not personally liable for the malpractice-related claims arising from the professional misconduct of another general partner.

Question 9

Define Limited Partnership

Answer 9

A partnership in which one or more partners are liable for partnership debt only to the extent of their capital contributions to the partnership. Limited partnerships must have at least one general partner. A limited partner’s role is restricted to that of a passive investor.

Question 10

Define Partnership

Answer 10

An unincorporated association or two or more business associates to conduct business as co-owners. Such associates can be individuals, corporations, and even other partnerships. They are both legal entities and accounting entities.

Question 11

Define Passthrough Entity

Answer 11

Business entity that is not a taxable entity. The income, gains, deductions, and losses recognized by a passthrough entity are reported by the entity’s owners and taxed only once at the lower level.

Question 12

Define Pro Rata Share

Answer 12

A shareholder’s share of any item of income, gain, deduction, loss, or credit recognized by an S corporation. Pro rata shares are based on the number of shares of outstanding stock owned by the shareholders.

Question 13

Define Self-Employment (SE) Tax

Answer 13

Employment tax levied on an individual’s net earnings from self-employment.

Question 14

Define Separately Stated Item

Answer 14

An item of income, gain, deduction, or loss recognized by a passthrough entity that retains its character as it flows through to the owners.

Question 15

Define Sole Proprietorship. 4

Answer 15

• An unincorporated business owned by one individual.
• Owns the business assets in their own name
• Personally liable for the business debts.
• No separate legal entity from the owner

Question 16

Define Subchapter S Corporation

Answer 16

A corporation with a subchapter S election in effect. The corporation is a passthrough entity for federal tax purposes and does not pay federal income tax.

Question 17

What are the two categories of business organizations?

Answer 17

Conduits - flow through entities - where there is not tax at the corporate level.
Corporations - Taxed at business level and again at individual level when profits are distributed.

Question 18

What is the rule of thumb for what is deductible from gross income?

Answer 18

Receipts are taxable UNLESS you can find a law that says it is excluded.
Expenses are deductible ONLY if you can find a law that says it is deductible.

Question 19

What are the main types of conduits?

Answer 19

• Sole Proprietorships
• Partnerships
• LLCs
• LLPs
• Ltd. Partnerships
• S. Corps

Question 20

Which businesses fall under subchapter K?

Answer 20

• Partnerships
• LLCs
• LLPs
• Ltd. Partnerships

Question 21

What forms to owners of sole proprietorships have to fill out?

Answer 21

Schedule C

Form 1040

Question 22

What forms to owners of subchapter K business’s have to fill out? 4

Answer 22

Form 1065 (U.S. Partnership Return of Income)
Schedule K-1 - informs owners of their burden (and informs them of other nonbusiness activities, charity contributions, investment income, etc)
Schedule E
Form 1040

Question 23

What forms to owners of S. Corps have to fill out?

Answer 23

Form 1120S
Schedule K-1
Schedule E
Form 1040

Question 24

What is a Schedule C? What is in Part 1? Part 2?

Answer 24

-Profit or Loss From Business. It is reported on the owner’s 1040.
-Part 1 - Gross income from the sale of goods to customers or performance of servic3s is accounted for here.
Part 2 - The proprietor’s deductible operating expenses and cost recovery deductions are listed here.

Question 25

What happens to the net profit that is computed on a Schedule C?

Answer 25

It is carried to the first page of Form 1040 as ordinary income and combined with all other income sources and the taxes are calculated from there.

Question 26

What happens if a business owner has a loss that exceeds their income?

Answer 26

They can carry it forward as a NOL deduction for the next 20 years or previous 2 years.

Question 27

What type of earnings from an owner’s investments are not considered business income and not reported on Schedule C?

Answer 27

Interest
Dividends
Rents

Question 28

What does the code on line B of a Schedule C do?

Answer 28

Tell the IRS which type of business you run.

Question 29

What % of income is withheld for Social Security? Medicare?

Answer 29

6. 2% up to 113,700

1. 45%

Question 30

What are the 6 steps for computing Self-Employment Tax?

Answer 30

Step 1: Group all Self Employment Income/Loss by taxpayer: Sole Proprietorships – Sch. C, Partnerships, LLCs and LLPs (NOT S Corps) – if the net is a loss – no self employment tax.

Step 2: Multiply answer in Step 1 by .9235. This is self employment taxable income.

Step 3: Calculate Medicare: Step 2 * .029

Step 4: Determine available OASDI Amount factoring in FICA Cap:

FICA Cap: / $110,100 (2012) / $113,700 (2013)
Less any wages:       \_\_\_\_\_\_\_    
Residual FICA Cap

      1.	If residual cap is zero or less – NO OASDI

      2. If residual cap > step 2 then: OASDI = Step 2 multiplied by .104 (2012)  / .124 for 2013
     3. If residual cap < step 2 then residual cap x .124

Step 5: Add Step 3 +4 = Total Self Employment tax: Carry to form 1040 page 2, line 56

Step 6: Take 50% of step 3 + step 4 : Deduct for AGI

Question 31

What is Form 4797?

Answer 31

Sales of Business Properties - When an owner disposes of assets used in business, recognized gains and losses are reported here. The tax consequences are dependent on details of the sale.

Question 32

Where is interest expense related to a sole proprietor’s business reported?

Answer 32

On their Schedule C.

Question 33

How are cash distributions generally treated in pass-through entities?

Answer 33

They are not taxed.

Question 34

When and how is pass through loss generally deductible for passthrough entities?

Answer 34

In the year the loss is generated at the individual’s marginal tax rate.

Question 35

How must corporations treat losses?

Answer 35

They must be carried (back) forward and used to offset income in a taxable year where profits are reported. NOL deduction provides a benefit at the corporation’s tax rate in the year the NOL offsets profits.

Question 36

What can businesses do about compensation paid to employees? Taxes withheld for employees?

Answer 36

Deduct both of those amounts from their gross income.

Question 37

What part of a sole proprietor’s income is taxed?

Answer 37

All of it, regardless of whether it is paid out or reinvested in the business. None of it can be paid to the owner as salary.

Question 38

What is an equity interest in a partnership?

Answer 38

An intangible asset.

Question 39

What is a Schedule K-1?

Answer 39

Partner’s Share of Income, Credits, Deductions, etc. It provides details concerning the partner’s distributive share of the partnership’s ordinary business income or loss and any separately stated items to the partners.

Question 40

What is a Schedule E?

Answer 40

Where partner’s take the information from the K-1 they have received from the partnership and report it as part of their own 1040.

Question 41

What is the difference between a salary and a guaranteed payment?4

Answer 41

• Because partner’s can’t be employees of their own partnership, FICA is not paid on the guaranteed payment by the partnership or the partner.
• The partnership does not hold income tax from the payment either.
• It also does not issue a W-2 for the payment.
• The total of the payments are reported as ordinary income on the partner’s schedule K-1.

Question 42

Which partners in a partnership are required to pay self-employment tax?

Answer 42

General partners are but not limited partners.

Question 43

What is a Form 1120S?

Answer 43

U.S. Income Tax Return for an S Corporation.

Question 44

What is one significant difference between partnerships and s corp in regards to compensation?

Answer 44

Owners of a S corp can be an employee of the corporation.