Income Tax Planning | Lesson 5: Entities

Question 1

Molly, a CPA, performed services for McButter Partnership and, instead of her standard fee, accepted a 15 percent unrestricted capital interest in the partnership with a fair market value of $10,000. How much income from this arrangement should Molly report on her tax return?

a) $0
b) $1,500
c) $10,000
d) $66,667

Answer 1

Answer: C
If a partner contributes services to the partnership, the partner must recognize ordinary compensation income for the value of the services. In this case, Molly must recognize $10,000 of compensation income.

Question 2

Red Company (a C corporation) owns 25% of Blue Company. During the year, Blue Company paid a $30,000 dividend to Red Company. Assuming that Red Company does not receive dividends from any other corporation, how much will Red Company’s dividends-received deduction be?

a) $0
b) $10.000
c) $19.500
d) $30.000

Answer 2

Answer: C
Red will include the $30,000 of dividend income in its gross income, but will be entitled to a dividends-received deduction of $19,500 ($30,000 x65%).

Question 3

Brisco Company, a calendar year S corporation, was incorporated in YR1. The company showed the follow-
ing taxable income and distributions each year:

The company has had a single shareholder since January 1, YR1, and his basis in the stock on that date was $10,000. Based on the figures above, what was the shareholder’s basis at the end of YR4?

a) $5,000
b) $10,000
c) $70,000
d) $215,000

Answer 3

Answer: C
The shareholder’s basis was $70,000 at the end of YR4, calculated as follows:

Basis at the beginning of YR1 | $10.000
YR1 Activity:
S corporation taxable income | 55,000
Distribution received | (35,000)
YR2 Activity:
S corporation taxable income |60,000
Distribution received | (25,000)
YR3 Activity:
S corporation taxable income | 50,000
Distribution received | (35,000)
YR4 Activity:
S corporation taxable income | 40,000
Distribution received | (50,000)
Basis at the end of YR4 | $70,000

Question 4

Richie Rich received a 70% capital interest in a general partnership by contributing the following:
Item Transferred | Richie's Basis | FMV
Land | $60,000 | $100,000
Debt (on Land) | N/A | (50,000)
Inventory | $10,000 | $8,000
Services | N/A | $2,500
What is Richie's basis in the partnership after the contribution?
a) $20,000
b) $57,500
c) $70,000
d) $110,500

Answer 4

Answer: B
Richie’s basis is $57,500, calculated as follows. Note that Richie gets relief from 30% of the debt on the property when he contributes it to the general partnership.

Basis of Land | $60,000
Debt (30% assumed by other partners) | (15,000)
Inventory (Basis) | $10,000
Services (FMV) | $2,500

Total Basis After Contribution | $57,500

Question 5

Jake is a general partner in Smoothie Queen, a general partnership. Jake received a K-1 from the partnership, which contained the following items:

Partnership Taxable Income | $200,000
Dividend Income | $2,500
Long-Term Capital Gain (on investments) | $6,000
How much self-employment tax will Jake have to pay in the current year?
a) Jake is not required to pay self-employment tax.
b) $14,130
c) $17,707
d) $23,584

Answer 5

Answer: D
Although Jake must report all items of partnership income, he is only required to pay self-employment tax on the partnership taxable income of $200,000. He would incur $23,584.30 in self-employment tax, calculated as follows:
Net earnings from self-employment 2022 |
$200,000 x 92.35%
= Amount subject to SE tax | $184,700

Social Security Portion (12.4% x$147,000) | $18,228
+ Medicare Portion (2.9% x $184,700) | $5,356.30

Total Self-Employment Taxes | $23,584.30