Partnerships, S Corps, Etc: Partnerships, S Corps

Question 1

Do S corps pay income tax on earned income?

Answer 1

No.

Question 2

Is tax-exempt income earned by an S Corp taxable at the shareholder level?

Answer 2

No.

Question 3

Can an S corp be a shareholder of another corp?

Answer 3

No.

Question 4

Are S corp losses deductible by owners against their ordinary taxable income?

Answer 4

Yes, if the owner has a sufficient tax basis in the investment.

Question 5

Schedule K

Answer 5

used to indicate how specified revenues and expenses of the partnership are passed through to the various partners.

Question 6

Schedule K-1

Answer 6

1. Indicates to the individual partners their share of the various income items reported by a partnership.
2. This excludes items such as charitable contributions and interest revenue which directly pass to the partners.

Question 7

How does buying a new LT asset affect a partner’s at-risk basis in the partnership?

Answer 7

1. The at-risk basis is increased by the amount of new debt (purchase price - cash paid) * ownership %.
2. Total at-risk basis is your contribution + (new debt * ownership %).

Question 8

When a partner enters a partnership or S Corp by contributing land and a building, what G/L can the partner recognize?

Answer 8

None. Because of the legal connection between a partner and a partnership, the tax basis normally does not change as a result of a conveyance.

Question 9

If A bought land on 6/6/11, then A and B form a partnership or S Corp on 6/6/12, when does the holding period for the land begin according to the partnership?

Answer 9

1. On 6/6/11, when the land was bought.

2. Because the tax basis stays the same, the holding period should also stay the same.

Question 10

Partner’s Capital Basis in Partnership at the end of year 1

Answer 10

Cash contributed
+ Tax basis of LT assets contributed
+ ownership % share of partnership income
- cash distribution

Question 11

One of the partners in a partnership sells his share of the business. According to the tax rules, this sale was large enough to create a partnerhsip termination of the old partnership. What is the significance of this termination?

Answer 11

The assets are deemed to be distributed to the remaining partners and then recontributed to form the new partnership.

Question 12

Is the basis of an S corp for a shareholder increased by tax-exempt income?

Answer 12

Yes.

Question 13

A new partner’s basis in the partnership when the partner conveys the following:

1. Land worth $400k.
2. w/liability of $100k.
3. The land gives the partner 40% ownership.

Answer 13

The partner's basis is:
 400k
-100k (liability)
\+ 40k (partner is 40% liable for liability)
=340k basis.

Question 14

If the basis received exceeds the owner’s basis in the business, then the basis of the items received…

Answer 14

must be reduced to the owner’s basis.

Question 15

If the partner receives a cash distribution in excess of his/her basis the partnership, then the basis of items received…

Answer 15

is 0.

Question 16

If A receives a cash distribution in excess of his/her basis the partnership, then the gain recorded by A is…

Answer 16

1. the cash distribution in excess of partnership,

2. Does not include the amount of the land received b/c the land has no tax basis to the partner.

Question 17

When the land received by A exceeds A’s basis in the partnership, A recognizes the land with a tax basis of…

Answer 17

1. A’s basis in the partnership.
2. When the basis of the property received is larger than the basis reported by the partner for the partnership as a whole, the upper limit of recognition for the partner is the basis in the partnership.

Question 18

normal rule for nonliquidating distributions

Answer 18

the tax basis is retained so that no income is recognized by either the partnership or the partner

Question 19

normal rule for liquidating distributions

Answer 19

1. tax basis of the partnership is first removed from the records of the partner and the received property is then recorded at this same amount.
2. tax basis in partnership - cash distribution = new basis in partnership

Question 20

Taxable income from C Corp ownership

Answer 20

Dividend income = distribution amount * ownership %

Question 21

Taxable income from S Corp ownership

Answer 21

S corp profits * ownership %.

Question 22

income items that pass directly to the partners

Answer 22

1. rent and royalty income, 2. capital gains and losses,
2. dividend and interest revenue,
3. and charitable contributions
4. All other items are lumped together to arrive at an ordinary income figure that is also allocated to the individual partners.

Question 23

reporting your share of partnership/S corp income when:
1. You own 10% of the company.
2. The company reports $5,000 capital gain, $5,000 interest revenue,
$50,000 sales of inventory

Answer 23

You report $500 capital gain, $500 interest revenue, $5,000 ordinary income (10% of everything in their respective sections).

Question 24

What can the partnership deduct as an expense: a set salary given to the partner, the distribution of partnership income to the partner, or both?

Answer 24

The set salary given to the partner.

Question 25

partner’s share in income

Answer 25

(partnership NI + reductions removed) * partnership income

Question 26

How does the removal of a reduction affect NI?

Answer 26

It raises NI.

Question 27

items removed to determine partner’s share in income

Answer 27

[Revenue

• CoGS
• Utility exp.
• Depr. exp]
• ownership %.

Question 28

Are cash distributions made to a partner considered taxable income?

Answer 28

No.

Question 29

What percentage of the stock of an S corporation must the owners wanting revocation of the S corp’s hold before revocation will take place?

Answer 29

More than 50%.

Question 30

How much of a business loss can a partner deduct?

Answer 30

Partnership NI * ownership %.

Question 31

G/L recognized by partner A in partnership liquidation where A receives only nonmonetary assets

Answer 31

None. Normally, in a partnership liquidation where the partner only receives nonmonetary assets, the partner picks up the new property at the basis of the old partnership so that no gain is recognized.

Question 32

Is rent expense deductible by the business?

Answer 32

Yes, but rent income passes through to the partners.

Question 33

G/L recognized by partner when s/he conveys an LT asset to the partnership with debt

Answer 33

If debt > tax basis, taxable gain recognized = debt - tax basis.