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Exam 13: Choice of Business Entity-General Tax and Nontax Factorsformation

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Question 1

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Ricardo is the marketing manager and owns a 40% interest in the Fielder Partnership. Fielder's taxable income before considering payments to partners is $80,000. Ricardo withdraws $40,000 for his personal living expenses. How much income must Ricardo report from Fielder?

A) $32,000
B) $40,000
C) $56,000
D) $72,000

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Question 2

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Moses is a 20% partner in an auto parts store where he works full-time. His share of the partnership income is $70,000, which is also his net-self-employment income. I.Moses must pay self-employment tax at the rate of 15.3% on 92.35% of the partnership income. II.Moses is allowed a deduction for AGI for 50% of the self-employment tax he pays during the year. ​

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

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Question 3

Multiple Choice

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Match each statement with the correct term below. -Limited Partnership

Zeppo and Harpo are equal owners of the Marx Corporation. During the current year, they agree to admit Groucho as a shareholder. Groucho will contribute $35,000 in cash and property worth $75,000 (adjusted basis of $55,000) for 40% of Marx Corporation's stock. How much gain will Groucho recognize from the transfer of the assets to the corporation?

A partner in a limited liability partnership (LLP) I.Has no liability for acts of malfeasance of any of the other partners. II.Has no liability for the debts of the partnership. ​

June is a 20% owner-employee in the Woodbourne Corporation, an S corporation. She is not paid a salary and her share of the corporation's income is $57,000. I.June must pay self-employment tax at the rate of 15.3% on her share of the S corporation's income. II.June must pay Social Security at a rate of 7.65% on her share of the S corporation income. ​

Discuss what limited liability means. What type of entity (or entities) offers this characteristic to its owners? What type(s) of entity (or entities) do not provide this characteristic?

Susan is a single taxpayer who is a 50% partner in a law firm. During the current tax year, the law firm has income of $200,000 that is effectively connected to the operation of the law firm. Susan has interest and dividends from her investment portfolio of $25,000. What is her Qualified Business Income (QBI) deduction for the current year?

Clark Exploration Corporation was organized and began operations on October 1, 2018. It incurs $41,000 in legal fees to obtain the corporate charter. The corporation elects to expense its organizational costs over the shortest allowable period. What amount will Clark report for organizational expenses for 2018?

Match each statement with the correct term below. -Limited Liability Company

Corporations generally are required to use the accrual method of accounting.

Shannon and Art are each 10% partners in the Such-A-Deal Partnership. Due to several years of partnership operating losses, both Shannon and Art have a zero basis in their partnership interests. For the current year, the partnership is incurring a loss of $100,000. When he hears the news about the loss, Shannon tells Art he wishes the partnership management would go to the local bank and borrow "a couple of hundred thousand dollars." Art does not understand why Shannon would want the partnership to go into debt. The concept of debt makes Art very nervous; Art personally does not borrow money. In fact, Art does not even use credit cards. Explain to Art why Shannon wants the partnership to incur more debt. Also, comment on why Art's general concerns about debt have merit, specifically focusing on the partnership debt.

During 2018, Jimmy incorporates his data processing business. Jimmy is the sole shareholder. The following assets are transferred to the corporation: $\begin{array}{l}\begin{array} { l c } \text { Cash } & \$ 2,000 \\\text { Computer Equipment: } & \\\text { Fair market value } & 20,000 \\\text { Adjusted basis } & 12,000 \\\text { Original cost } & 24,000 \\\text { Furniture: } & \\\text { Fair market value } & 20,000 \\\text { Adjusted basis } & 32,000 \\\text { Original cost } & 64,000\end{array}\\\end{array}$ $\text { What will be the basis of the assets to the corporation after the transfer? }$ $\begin{array} { c c c } \text { Computer Equipment } & \text { Furniture } \\\end{array}$ A) $\begin{array} { c c c } &&\$ 20,000 & &&&& \$ 20,000 \\\end{array}$ B) $\begin{array} { c c c } &&\$ 12,000 &&&& & \$ 20,000 \\\end{array}$ C) $\begin{array} { c c c } &&\$ 20,000 &&&&& \$ 32,000 \\\end{array}$ D) $\begin{array} { c c c }&& \$ 12,000 &&&&& \$ 32,000\end{array}$

Which of the following is/are correct with respect to limited liability companies (LLCs) ? I.An advantage of an LLC when compared to a regular corporation is the ability to pass through tax attributes to owners. II.A disadvantage of a general partnership when compared with an LLC is the inability of owners to have limited liability. ​

Julian and Tanya each contribute $50,000 cash to form the M&T Partnership on January 4, 2018. Julian and Tanya share profits and losses in the ratio of 60% and 40%, respectively. During 2018, the partnership generates ordinary income of $80,000. A cash distribution of $5,000 is made to Julian in December 2018. How much income must Julian recognize from the partnership in 2018?

Limited liability refers to an owner's liability for which of the following? I.The amount invested in the entity. II.The liabilities of the corporation that the owner has personally guaranteed. III.All of the outstanding liabilities of the corporation. IV.Only for the corporation's loans from financial institutions ​

Once a corporation is formed, an exchange of the corporation's stock for property is always a nontaxable event.

During 2018, Jimmy incorporates his data processing business. Jimmy is the sole shareholder. The following assets are transferred to the corporation: $\begin{array} { lc } \text { Cash } & \$ 2,000 \\\text { Computer Equipment: } & \\\text { Fair market value } & 20,000 \\\text { Adjusted basis } & 12,000 \\\text { Original cost } & 24,000 \\\text { Furniture: } & \\\text { Fair market value } & 20,000 \\\text { Adjusted basis } & 32,000 \\\text { Original cost } & 64,000\end{array}$ ? How much gain (loss) will Jimmy recognize from the transfer of the assets to the corporation?

Which of the following businesses can use the cash method? I.The Hateris Group, a partnership with 3 equal partners, of which one is The Hillard Corporation. Average revenues for the Hateris Group, a financial planning firm, over the last three years are $4,000,000. II.The Glidder Corporation, a clothing retailer that has average annual sales over the last three years are $35,000,000. ​

Foster owns 27% of the Baxter Corporation, whose ordinary income is $100,000. His salary for the year is $50,000. What amount must Foster pay in Social Security taxes if Baxter is a(n) ? $\begin{array} { c l } \text { Corporation } & \text { S Corporation } \\\end{array}$ A) $\begin{array} { c l } \$ - 0 - &&&& \$ 3,825 \\\end{array}$ B) $\begin{array} { c l } \$ 3,825 &&&& \$ - 0 - \\\end{array}$ C) $\begin{array} { c l } \$ 3,825 &&&& \$ 3,825 \\\end{array}$ D) $\begin{array} { c l } \$ 3,825 &&&& \$ 7,650 \\\end{array}$ E) $\begin{array} { c l } \$ 3,825 &&&& \$ 11,475\end{array}$