HW chp 20Questions

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School

Angelo State University *

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MISC

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Economics

Date

Feb 20, 2024

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docx

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Uploaded by ProfessorArmadilloPerson1008

1. Taylor Partnership is a general partnership with 3 equal partners. In the current year, Taylor generated taxable business income of $3,000 and made $0 distributions to its partners. How will the $3,000 be taxed for Federal income tax purposes? a. No tax at the partnership level and no tax at the partner level since no distributions were made. b. Tax all $3,000 at the partnership level and tax none at the partner level. c. No tax at the partnership level and all $3,000 taxed at the partner level. d. Tax all $3,000 at the partnership level and the after-tax amount is taxed to the partners. 2. Partnerships are taxed under: a. both the entity and aggregate approach: Partnership taxation has elements of both the aggregate approach (no tax at the partnership level) and the entity approach (partnerships make tax elections). b. solely the entity approach c. solely the aggregate approach 3 .Brenda is entitled to a 10% share of the net assets of the GTC Partnership if it were to liquidate. Brenda's right can be described as: a. capital interest: A capital interest is a partner's share of the net assets of a partnership at liquidation. b. stock interest c. profits interest 4. A partner contributes property or services in exchange for the general ownership interest called a(n) 5 .Realized gains and losses that result from the exchange of contributed property for a partnership interest are: a. never deferred for tax purposes b. are fully or partially deferred for tax purposes 6. Clark is preparing to contribute property with a value of $5,000 and basis of $20,000 to a partnership. A better tax alternative is to:

a. continue with the contribution. The built-in loss will NOT have to be recognized b. sell the property, recognize the loss and contribute the cash from the sale. Clark will be able to recognize the loss by selling the property rather than contributing property with a built-in loss to a partnership.  Entity approach: Taxes the entity separates from the owners  Aggregate approach: Treats the entity as an aggregation of owner's interests  Capital interest: Partner's right to the net assets of the partnership at liquidation  Profits interest: Partner's right to the share of future income or losses of the partnership  Partnership interest: The bundle of economic rights a partner receives for his investment in a partnership 7. A partnership's basis in its own assets is known as the inside basis. 8. Brenda is entitled to a 10% share of the net assets of the GTC Partnership if it were to liquidate. Brenda's right can be described as: a. profits interest b. capital interest. A capital interest is a partner's share of the net assets of a partnership at liquidation. c. stock interest 9. Agatha contributes cash of $10,000 plus land valued at $25,000 (basis = $5,000) subject to a nonrecourse mortgage of $15,000 to the Kristy Partnership for a 50% interest. What is Agatha's outside basis in Kristy immediately after the contribution? a. $15,000 b. $12,500. Agatha's basis equals: $10,000 cash + $5,000 land + $10,000 debt in excess of basis + $2,500 (50% of remaining debt) - $15,000 debt relief = $12,500. c. $0 10 .The deferral of realized gains or losses on property contributed to partnerships allows entrepreneurs the option to organize their businesses without having to pay taxes. a. True

b. False 11. Which of the following are recognized by the partner on the contribution of property to a partnership by a partner? a. Both built-in gains and losses b. Neither built-in gains nor losses. Partners do not generally recognize gain or loss when they contribute property to a partnership. c. Built-in losses 12. A partner's interest in a partnership interest is treated as a(n): a. tax-exempt asset b. capital asset. A partnership interest is a capital asset c. ordinary asset 13. Duncan has land that he purchased 5 years ago and equipment that he purchased this month. He contributes both to the DoNut Partnership in exchange for a partnership interest. What is DoNut's holding period for each asset? a. Long-term for the land and short-term for the equipment; the holding period for both assets carries over from the partner. Generally, the holding period carries over from the contributing partner. b. Short-term for both the land and the equipment; the holding period starts over at the date of contribution. c. Long-term for both the land and equipment; the longer holding period takes precedent for all assets contributed. 14. A partner's tax basis in his or her partnership interest is increased by the: a. tax basis of the property contributed. The partner takes the substituted basis equal to the tax basis of the contributed property. b. fair market value of the property contributed c. lesser of the tax basis or the fair market value of the property contributed 15. Entities taxed as partnerships track the equity of their owners using a(n) CAPITAL ACCOUNT for each owner. 16. If a partnership has debt, the debt generally serves to increase the partner's outside basis. a. True. Debt is generally allocated in some way to partners to include in their tax basis. b. False

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 Capital interest received: Service partner recognizes ordinary income for the liquidation value of the partnership received  Profits interest received: Service partner does NOT immediately recognize ordinary income for value of partnership interest received  Contribution of property: Outside basis = basis of contributed property - debt relief + debt allocated + gain recognized  Contribution of services: Outside basis = liquidation value of capital interest + debt allocated  Purchase: Cost basis + debt allocated 17. On January 1, 20X3, Glenda contributes $10,000 cash to the Ruby Partnership in exchange for a partnership interest. What is Glenda's holding period in her Ruby interest on February 1, 20X3? a. Partnership interests do not have a holding period b. Short-term. Only with the contribution of a capital asset or 1231 property does the holding period of the contribution tack on. c. Long-term 18. How does a partnership adopt an overall method of accounting for tax purposes? a. By contacting the IRS for permission b. By the biggest partner sending a letter to the IRS Commissioner c. By filing a tax return. Many partnership elections are made by simply filing the first tax return using those elections. 19. Duncan has land that he purchased 5 years ago and equipment that he purchased this month. The land was held as an investment and the equipment was personal-use. He contributes both to the DoNut Partnership for use in a new partnership business in exchange for a partnership interest. What is the character of the property to DoNut? a. Since DoNut will be using the land and equipment in a trade or business, it will be ordinary and then 1231 after one year. The character of the property is dictated by the partnership's use and does NOT carry over from the partner. b. The land will retain its capital character since it was an investment. The equipment becomes ordinary and then 1231 after one year.  1st step: Majority interest tax year

 2nd step: Principal partners  3rd step: Least aggregate deferral  Tax capital accounts: Reflects the tax basis of the contributed assets  GAAP capital accounts: Reflects the generally accepted accounting approach to capital accounts  704(b) capital accounts: Reflects the fair market value of the contributed assets 20. Partnerships with _______as partners are generally not eligible to use the cash method of accounting for tax purposes. a. individuals b. C corporations. c. other partnerships 21. Lawrence and Mohammed (50% partners) invited Frizz to join their partnership. Frizz provided services in exchange for a capital interest with a liquidation value of $10,000. What is the effect of this exchange on the tax basis of each partner? a. No effect on basis; Lawrence and Mohammed take a deduction for $5,000 each and Frizz recognizes $10,000 income. b. No effect on basis and no deductions or income. c. Lawrence decreased by $5,000, Mohammed decreased by $5,000, Frizz increased by $10,000 . By transferring $10,000 of capital interest to Frizz, Lawrence and Mohammed decrease their ownership by the same in total (50% each). 22. Murtaugh decides he is ready to leave the LW Partnership and sells his interest (basis = $30,000) to Riggs for $75,000. Murtaugh was an original partner in LW when it was formed 5 years ago. LW has no debt. What is Rigg's basis and holding period in his newly acquired LW interest? a. Basis = $30,000; holding period begins at date of purchase b. Basis = $30,000; holding period carries over from previous partner c. Basis = $75,000; holding period begins at date of purchase. The basis of a purchased partnership interest is the cost + share of debt. The holding period begins on date of purchase. 23. Newly formed Chasbro Partnership is preparing its first tax return. Who makes the election to expense a portion of the partnership's start-up costs?

a. The partnership. The partnership makes almost all tax elections. b. The partner with the largest interest c. The partner with the earliest-year end d. Any partner 24. The tax law relating to the selection of a tax year-end for partnerships generally requires the partnership to adopt a tax year with the a. method that provides NO deferral. b. most aggregate deferral. c. least aggregate deferral. The tax law is constructed to provide the least opportunity for deferral by partners. 25. During the current year, Jason received guaranteed payments of $12,000, $1,000 and $0 from his ownership interest in a partnership (he is a general partner), an LLC, and a limited partnership (he is a limited partner), respectively. The partnership, LLC, and limited partnership also allocated ordinary income (loss) to Jason of ($4,000), $2,000, and $6,000, respectively. Assuming Jason provided limited services to the LLC but is NOT involved in the management, what is Jason's self-employment income/loss for the current year? a. $17,000 b. $13,000 c. $9,000. All guaranteed payments are treated as self-employment income. The ordinary loss from the general partnership is considered self-employment income. Since Jason is NOT a managing member of the LLC, he does not include the business income from the LLC. Limited partnership income is not considered self-employment income. $13,000 - $4,000 = $9,000. 26. Consistent with other types of entities, partnerships with gross receipts exceeding a certain threshold must use the accrual method for the purchase and sale of INVENTORY OR MERCHANDISE 27. A partner's share of capital gains are not included in when calculating the QUIALIFIED BUSINESS INCOME deduction, but must be included for calculating the NET INVESTMENT income tax

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28. The Lonely Partnership had an overall net loss of $57,000. Included in that amount was net capital gains of $5,000, tax-exempt interest of $1,000, and a guaranteed payment of $10,000 to one of the partners. Compute the amount of ordinary business income or loss for Lonely. a. $51,000 loss b. $53,000 loss c. $57,000 loss d. $63,000 loss. $57,000) overall loss - $5,000 capital gains - $1,000 tax exempt income. Although the guaranteed payment is a separately stated item for the receiving partner, it is also a deduction for ordinary business income. 29. Which of the following BEST describes a guaranteed payment? a. A payment by the partnership to a third-party creditor (like a bank) that has received a personal guarantee by a partner b. A payment made by a partnership to a partner whether the partnership generates income or losses. Guaranteed payments are from the partnership to the partner. Guaranteed payments are to the partner for services or the use of capital, regardless of whether the partnership made income c. A payment from the partner to the partnership that is a required contribution per the partnership agreement 30. Nadia contributed cash of $20,000 to form the USSR Partnership. At the same time, Elena contributed land worth $20,000 (her basis was $5,000 at the time of contribution). They both received a 50% capital and profits interest. Shortly after the partnership was formed, USSR sold the land for $22,000. How is the gain on the sale of the land allocated to the partners? a. Elena $11,000; Nadia $11,000 b. Elena $15,000; Nadia $2,000 c. Elena $16,000; Nadia $1,000. The built-in gain of $15,000 must be allocated to the contributing partner. The remaining gain of $2,000 is shared in accordance with the profit and loss sharing ratios. 31. Steven is a member in Manyou LLC. As part of his ownership in Manyou, he also personally guaranteed a portion of Manyou's debts and is considered the managing member of the company (basically he signs all the contracts and checks). Manyou paid Steven a guaranteed payment of $5,000 and

allocated business loss of ($2,000) to him in the current year. What is Steven's self-employment income/loss from Manyou? a. $7,000 b. $3,000. Steven includes both the guaranteed payment (all guaranteed payments are self-employment income) and the share of the Manyou loss, since he has a high level of involvement with the LLC and guarantees its debt. $5,000 - $2,000 = $3,000 c. $5,000 32. Partnership income tax returns are due: a. 15th day of the 3rd month after year end b. always on March 15th 33. A partner's share of excess (disallowed) business interest expense of a partnership: a. Is reported to the partner and currently deductible. b. Is reported to the partner and reduces the partner's outside basis. c. Is not reported to the partner since it is disallowed. 34. Howell Partnership has two partners (each 50% interest), Al and Cal. Howell generated ordinary income of $20,000 this year, but only made a cash distribution of $10,000 to Al. Which of the following BEST describes the income that Al and Cal will recognize this year? a. $10,000 income for Al; $10,000 income for Cal. Partners must recognize income whether they receive a distribution or not. b. $5,000 income for Al; $5,000 income for Cal 35. Which of the following is NOT a decrease to basis in a partnership interest? a. Cash distributions made by the partnership to the partner b. Partner's share of non-deductible expenses c. An increase in the partner's share of the debt of the partnership d. Separately stated loss items e. Guaranteed payments for services are treated as ORDINARY income by the partners that receive them.

36 .Partnership allocations of income and loss should:  have substantial economic effect.  be defined in the partnership agreement. 37. Which one of the following actions could increase a partner's basis in the partnership, allowing that partner to deduct additional suspended losses? a. Guaranteeing more partnership debt b. Having the partnership make additional cash distributions to the partner c. Have the partnership enter into activities that create separately stated loss items, rather than ordinary loss items 38. Which of the following BEST describes a Form K-1? a. A schedule that provides the total income/loss of the partnership and the partner's individual profits ratio for calculating the individual share b. A schedule prepared for each partner listing his or her individual share of the partnership's ordinary income/loss and separately stated items 39. The basis amount and the at-risk amount of a partnership interest generally only differ by the amount of non-qualified nonrecourse financing. a. True b. False. Generally, only nonrecourse financing that is NOT qualified is not included in the at-risk amount, but is included in basis. 40. Victoria contributes cash of $10,000 in exchange for a partnership interest. In the first year, her share of dividends, tax-exempt income and ordinary business loss are $2,000, $1,000 and ($4,000), respectively. The partnership also makes a cash distribution to her of $10,000. What is Victoria's adjusted basis at the end of the year? a. ($1,000) b. $3,000 c. $0. Her original basis equals $10,000. Then add income items of $2,000 and $1,000, less distributions of $10,000 and finally less the loss of $4,000 = ($1,000). Basis can NOT be negative, so it equals $0. 41. Guaranteed payments for services are

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a. only deducted from ordinary income or loss and NOT a separately stated item. b. separately stated items and deducted from ordinary business income or loss. Guaranteed payments must also be deducted from ordinary business income or loss. c. separately stated items, but are NOT deducted from ordinary business income or loss. 42. Place the following in the order in which any partnership loss limitations are considered. 1. Basis limitations 2. At risk limitations 3. Passive loss limitations 43. Losses from a partnership that exceed the partner's basis: a. are lost forever b. can be carried back two years and forward twenty c. are considered deductible to the extent of passive income d. are suspended and carried forward until sufficient basis is created 44. Which of the following is NOT a passive activity? a. A rental real estate business in which the real estate developer works full time. Although most rental real estate is considered passive, partnership activities such as real estate development can be active if the partner spends sufficient time on them. b. A limited partnership investment c. A rental real estate activity by an individual taxpayer with over $200,000 in other forms of income 45. Which of the following are requirements to be classified as qualified nonrecourse financing? a. The creditor is NOT a related party b. The debt has a term of more than ten years

c. The creditor is a commercial lender d. The debt is secured by real property  Dividends: Portfolio  Wages: Active  Income from limited partnership: Passive 46. Partners are taxed on partnership income when it is: a. Earned by the partnership. Partners are taxed when the partnership earns the income, NOT when the partnership distributes the earnings. b. Distributed by the partnership. Distributions that do NOT exceed a partner's basis are not taxed. 47. Passive losses can be:  offset against ordinary income when the passive activity is disposed.  considered only after the basis and at-risk limitations are considered.  offset against passive income. 48. Participants in activities are considered passive unless their involvement in the activity is a. Managerial b. Regular c. Continuous d. Substantial. Terms that indicate an activity is NOT passive include regular, continuous and substantial. 49. Michelle owns a condominium near a college campus that she rents to college students each year. Unfortunately, Michelle was unable to find students to rent to for the entire year and her condo operated at a loss. Which of the following BEST describes how Michelle must treat her loss? a. As active loss as long as she uses a management company b. As an active loss for up to a $25,000 loss if her income is low enough and she actively participates. There is an exception to treating rental real estate as passive if the individual is an active participant with income under a certain threshold. 50. As portfolio loss as long as she sells the condo before the end of the tax year

Which of the following is NOT an increase to a partner's adjusted basis in a partnership interest? a. Cash distributions paid from the partnership to the partner b. Cash contributed by a partner to a partnership. Cash contributions represent an increase to a partner's basis. c. Partner's share of partnership income. Income allocated to a partner increases his or her basis in the partnership. 51. Gandy is allocated a $10,000 passive loss from his investment in a partnership. Which of the following types of income can be offset by Gandy's passive losses? a. Income from Gandy's investment in a limited partnership. b. Income from Gandy's job as an X-ray technician for a local hospital. Wages paid to Gandy for his employment is active income. c. Royalties that Gandy earns from a television commercial he acted in a few years ago. Royalties are a form of portfolio income that can NOT be offset by passive income.

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HW chp 20Questions

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