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Question 1 Greg and Samantha plan to establish a business in which they will both materially participate. They are both in the 35% marginal tax bracket. Although they expect the business to be very successful in the long-run, they project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is very important for the owners. Which form of business entity should they select considering both tax and nontax factors? General partnership C corporation S corporation It makes no difference; any of the above should satisfy Greg and Samantha. Question 2 Which of the following cannot be taxed as a partnership? An accounting PLLC An LLC with only one member An LLC owning only rental property A partnership with no limited partners All are taxed as partnerships. Question 3 Trudi Corporation has a building that it needs to sell or exchange because of growth in its business. If Trudi sells the building, it will have a gain of $450,000. How much would it save on current taxes if it can do a tax-free exchange of the building instead of selling it? The corporation has $1,000,000 of taxable income from operations (not counting the sale or exchange) for the curent year. $90,000 $153,000 $175,500 $450,000 None of the above. Question 4 Which of the following is not a positive adjustment to taxable income to determine current earnings and profits? Federal income taxes paid Proceeds of life insurance Capital loss carryovers Dividend received deduction Question 5 Sophie received a 30 percent interest in a general partnership in exchange for property valued at $35,000 (adjusted basis = $25,000) and services valued at $5,000. In addition, the partnership assumed a $10,000 liability on the property. What is Sophie's basis in her partnership interest? $20,000 $23,000 $25,000 $39,000 None of the above Question 6 A large corporation had a net long-term capital loss in 2013 and net operating loss in 2013. What are the earliest year(s) to which these losses can be carried? 2010 for both 2009 for both 2011 for the capital loss; 2009 for the NOL 2010 for the capital loss; 2011 for the NOL Question 7 Jude received a $25,000 distribution from BC Corporation that the corporation identified as $15,000 dividend and $10,000 return of capital. What effect does this distribution have on Jude's taxable income if his basis in the stock of BC is $8,000? Increase of $25,000 Increase of $17,000 Increase of $15,000 Increase of $10,000 Question 8 The accumulated adjustment account is a shareholder account. can be reduced below zero by an excess distribution. determines when there is a tax-free distribution during the post-termination period. is important in applying loss limitation rules. Question 9 Tom owns 60 percent of CDF Corporation. CDF rents a building from Tom for $4,500 per month. Fair rental value for the building is only $3,000 per month. In addition, CDF employs Tom's son as the general manager at a salary of $350,000 annually. Similar positions in similar businesses pay $200,000 annually. How much rental and dividend income should Tom report on his tax return for the year? $54,000 rental income $54,000 rental income; $150,000 dividend income $36,000 rental income; $18,000 dividend income $36,000 rental income; $168,000 dividend income Question 10 Which of the following may not be partners in a partnership? Sole proprietorship Corporation S corporation LLC All may be partners. Question 11 Which of the following is NOT a required characteristic of a qualifying Section 351 transaction? If more than 20 percent of the stock is transferred for services, property must also be transferred by the service provider. Gain may be recognized if the transferor receives something other than stock. The transferors must control the corporation after the transfer. Control requires only owning 80 percent of the value of the voting stock Question 12 Soho is a personal service corporation that has $1,100,000 of gross revenue and $1,021,000 of deductible expenses? What is its income tax liability? $79,000 $30,494 $27,650 $26,860 $15,110 Question 13 Carol owns 40 percent of CJ Partnership. The partnership reports $170,000 of revenue, $60,000 cost of goods sold, and $70,000 of other expenses that include $1,500 of doctor bills paid for Carol, a $2,000 charitable contribution, and a $5,000 Section 179 deduction. What is the bottom line net income reported on Carol's Schedule K-1? $48,500 $40,000 $19,400 $16,000 Question 14 Which of the following is NOT a characteristic of a like-kind exchange? The holding period for like-kind property includes the holding period of the property surrendered. Receipt of boot can cause gain recognition up to the gain realized. Business realty can be exchanged for business personalty. Personal-use assets do not qualify for like-kind exchanges. All are like-kind characteristics. Question 15 Which of the following is not a characteristic of a partnership? Must be formed under state law Formation is generally tax-free except for services received for a partnership interest Distributions of entity income are tax-free None of the above Question 16 Manuel purchased a 30% interest in MAC general partnership for $40,000 cash and materially participated in the partnership for the entire year. The partnership had $50,000 in liabilities when Manuel purchased his interest and the liabilities increased $10,000 during the year. If the partnership incurred a $300,000 loss this year, how much of this loss can Manuel deduct? 0 $40,000 $58,000 $65,000 $90,000 Question 17 The S corporation income tax return includes all of the following except a Schedule K. an M-1 Schedule. a retained earnings reconciliation. a reconciliation of the AAA account. Question 18 Calvin sells his 40 percent interest in a partnership with a $70,000 basis for $75,000. The partnership has two assets, inventory valued at $100,000 with a $50,000 basis and investments valued at $87,500 that have a basis of $125,000. How will Calvin report the sale of the partnership interest? $5,000 capital loss $20,000 ordinary income $20,000 ordinary income; $15,000 capital loss $5,000 capital gain Question 19 A corporation that owns 72 percent of all the outstanding stock of another corporation: May not file a consolidated return May file a consolidated return May take a 100 percent dividend received deduction May take a 70 percent dividend received deduction Is the parent of the 72 percent-owned company Question 20 Moranza Corporation, which has current earnings and profits (CE&P) of $10,000 and accumulated earnings and profits (AE&P) of $30,000, makes a $15,000 distribution to its sole shareholder, Justin, at the end of the current year. Justin has a basis in his Moranza stock of $2,000. What is the amount of taxable income Justin must report from the Moranza distribution? 0 $10,000 $12,000 $15,000 Question 21 A clothing manufacturing corporation donates last year's inventory to the Red Cross for use in its disaster relief efforts . The clothes have a fair market value of $200,000 and a basis to the corporation of $75,000. What is its charitable contribution deduction? $200,000 $150,000 $137,500 $75,000 Question 22 Which of the following characteristics is the same for transfers of property to both a corporation and to a partnership in exchange for an ownership interest? The transferors must have control of the corporation or partnership after the transfer. Liabilities assumed affect the owner's basis in the entity's business in the same manner. Loss is not recognized. The holding period for all the assets transferred begins on the date of the transfer. None of the characteristics are the same for both entities. Question 23 James and Jerry are equal partners in JJ partnership. James works full-time in the business and receives a $40,000 guaranteed salary from the partnership. Jerry is to receive the first $20,000 of profits before the remainder is divided equally between James and Jerry. If the accounting income before either of these payments is $30,000, what is the amount of income or loss allocated to Jerry? 0 $10,000 ($5,000) ($10,000) Question 24 Duet Co. is a calendar year S Corporation owned equally by Patricia and Scott. Duet Co. had taxable income of $40,000 for the current year. Patricia and Scott each received distributions from Duet Co. of $5,000. What is Patricia's taxable income from Duet Co. for the current year? 0 $5,000 $20,000 $25,000 $44,000 Question 25 Which of the following is NOT a characteristic of an S corporation? Must be formed under state law The transfer of property for stock is always tax-free A shareholder's share of ordinary income increases his or her stock basis The shareholder never recognizes loss on a nonliquidating distribution Question 26 A transfers machines valued at $170,000 (basis = $150,000) along with $30,000 cash to AB Corporation and B transfers real property valued at $320,000 (basis = $310,000) to the corporation. A receives 40 percent of the outstanding stock and B receives 60 percent. B also receives $20,000 from the corporation. What are A's and B's recognized gains or losses, respectively, on these transfers? $20,000, 0 0, $20,000 0, $10,000 0, 0 None of the above Question 27 Which of the following statements does NOT apply to a qualifying S corporation? It may have 55 shareholders It may have a resident alien shareholder It may only have one class of stock outstanding It is normally subject to the regular corporate income tax None of the above Question 28 Which of the following is not a separately stated item on a partnership's Schedule K? A $5,000 long-term capital loss $20,000 of Section 1245 recapture $3,000 charitable contribution $5,000 bond interest All are separately stated. Question 29 Which of the following is NOT a potential S corporation tax? The personal holding company tax The built-in gains tax The LIFO recapture tax The excess passive investment income tax Question 30 Which of the following does not affect the basis of S corporation stock? Tax-exempt income Nondeductible expenses Charitable contributions Capital gains All affect stock basis Question 31 Which of the following would be an indication that corporate debt is disguised equity? Debt is issued to the shareholders in the same proportion as stock The debt has a specified maturity date The debt has a specified interest rate Interest is paid annually Question 32 In a like-kind exchange, boot is: Illegal Not like-kind property Never given Never received Question 33 Ray, Ronnie and Joe are partners in a limited partnership. Ray and Ronnie, the limited partners, each own 45 percent of the partnership and Joe, the general partner, owns the other 10 percent. The partnership incurs $50,000 of nonrecourse debt and $100,000 of recourse debt. What is the effect on Joe's basis for these debts? Increases by $155,000 Increases by $105,000 Increases by $100,000 Increases by $15,000 None of the above Question 34 The maximum marginal corporate tax rate EXCLUDING surtaxes is: Equal to the maximum individual tax rate More than the maximum individual tax rate 34 percent 39 percent None of the above Question 35 The taxpayer-use test for qualifying replacement property applies only to personalty requires replacement property used by the taxpayer to be used in the same business as the converted property only requires leased realty to be replaced with other leased realty is more restrictive than the functional-use test Question 36 Which of the following is NOT a requirement to make an S election? Maximum 100 shareholders One class of stock issued and outstanding Shareholders must be citizens It must be a domestic corporation Question 37 What is the amount of the casualty loss on a business truck that had a fair market value of $14,000 before an accident and $4,000 after an accident, if its adjusted basis is zero? $14,000 $10,000 $4,000 0 None of the above Question 38 Which of these is NOT considered an advantage of the corporate business form? A shareholder-employee's salary is fully deductible from corporate income Shareholders are not taxed on corporate income until it is distributed to them Shareholder-employees can participate in employee fringe benefits Corporate shareholders cannot deduct corporate losses from their income Question 39 Corbin has a $15,000 basis in his 50 percent ownership in an S corporation and lent the corporation $5,000 last year. The corporation has $30,000 of other debt. This year the corporation reported a $100,000 loss. How much of this loss may Corbin deduct? $15,000 $20,000 $35,000 $50,000 Question 40 Which of the following is NOT an acceptable partnership tax year? The tax year used by any principal partner The tax year used by the partners who own a majority interest A tax year that results in a 2 month-deferral of income for the partners C's tax year if C owns more than 50 percent of the partnership A year-end that coincides with the partnership's natural business year Question 41 A corporation has pre-tax book income of $324,000. In determining this income, the corporation included $2,000 of tax-exempt interest, $6,000 of dividends from an affiliated corporation, a capital loss of $50,000 and $3,000 of excess book depreciation. What is the corporation's taxable income? $369,000 $328,000 $269,000 $263,000 Question 42 Coho is a corporation that has $1,100,000 of gross revenue and $1,021,000 of deductible expenses? What is its income tax liability? $79,000 $30,494 $26,860 $15,110 None of the above Question 43 Bertram transfers property with a $50,000 mortgage, a fair market value of $350,000, and a basis of $200,000 for stock valued at $300,000. If the corporation assumes the mortgage, what is Bertram's basis in the stock received in this qualifying Section 351 transaction? $200,000 $250,000 $300,000 $350,000 None of the above Question 44 Which of the following is NOT a characteristic of a corporation? Associates Limited life Limited liability Profit motive Central managemen Question 45 Velma contributes cash of $50,000 and property with a fair market value of $110,000 (adjusted basis of $30,000) to the V&M partnership. Velma's basis in the partnership interest is: $80,000 $50,000 $30,000 $110,000 Question 46 In early 2013, Conrad Corporation discovered their bookkeeper had embezzled $30,000 over the last three years at a rate of approximately $10,000 per year. Conrad also suffered uninsured hurricane damage of $40,000 late in 2013 in a presidentially declared disaster area. If Conrad wants to deduct its losses at the earliest time possible, what are the amounts and year(s) of its loss deduction? 2013 = $70,000 2012 = $30,000, 2012 = $40,000 2012 = $40,000, 2013 = $30,000 2011 = $10,000, 2012 = $10,000; 2013 = $50,000 None of the above Question 47 An S election terminates when a shareholder dies. when there is a nonresident alien shareholder when the S corporation invests in a C corporation the first year an S corporation has excess passive income Question 48 At the beginning of the year, Jill's basis in her 40 percent limited partnership interest was $10,000. During the year, the partnership reported a loss of $90,000 and the partnership obtained a $40,000 recourse loan on some machinery. How much of the partnership loss may Jill deduct if she has $40,000 of passive income from other sources? $10,000 $16,000 $26,000 $36,000 Question 49 Samantha and Ashley form the MAS General Partnership. Samantha contributed $20,000 cash in exchange for her 50 percent partnership interest. During the first year of partnership operations, the partnership reported net taxable income of $10,000, Samantha withdrew $8,000 cash from the partnership, and the partnership took out an $18,000 loan on the last day of the year. Samantha's adjusted basis for her partnership interest at year end is: $38,000 $30,000 $26,000 $25,000 $20,000 Question 50 Stewart is a 30 percent general partner in STP Partnership. His basis in his partnership interest at the beginning of the year was $40,000. During the year, the partnership reported a $30,000 loss and paid off a $120,000 recourse debt. What is Stewart's year-end basis in his partnership interest? 0 $4,000 $31,000 $67,000