M5-Items from Other Entities

Question 1

Trusts are separate income tax-paying entities. Distributions made by trusts are deductible by the trust, but taxable to the recipient. This avoids double taxation of trust income. (true or false)

Answer 1

true

All income in a trust is subject to taxation. Income retained in the trust will be taxed at the trust level only, while income distributed by the trust will be deductible at the trust level, but taxable to the beneficiaries.

Question 2

Guaranteed payments to partners are deductible on Form 1065, Line 10, to arrive at partnership ordinary income. On schedule K-1, guaranteed payments are shown as income on Line 5 and flow through as ordinary income. (true or false)

Answer 2

true

Question 3

The “at risk” rules limit the deductibility of the distributive share of the losses of an S corporation to the amount the taxpayer has “at risk” (as opposed to non recourse loans) and could actually lose from an activity. (true or false)

Answer 3

True

Question 4

Gain or loss from the S Corporation’s sale of collectibles is separately reported on the Schedule K-1 of IRS from 1120S. (true or false)

Answer 4

true

Question 5

A guaranteed payment is a salary or other payments to a partner that is not calculated with respect to partnership income. (true or false)

Answer 5

true

A 25% interest in partnership profits is not a guaranteed payment.

Question 6

Each shareholder reports his/her pro rata share of the S Corporation’s taxable income in his or her gross income. The distributions are not taxable to the extent the shareholder’s basis exceeds the distribution (and increased for any income reported by them during the year). (true or false)

Answer 6

true