The RB Partnership is owned equally by Rob and Bob, Bob's basis is $14,000 at the beginning of the tax year. Rob's basis is $9,000 at the beginning of the year. RB reported the following income and expenses for the current tax year:
Sales revenue $130,000
Cost of sale 45,000
Guaranteed payment to Rob 24,000
Depreciation expense 12,500
Rent expense 16,000
Interest income 3,000
Tax-exempt interest income 4,500
Payment to Mount Vernon Hospital for
Bob's medical expenses 10,000
a) Determine the ordinary partnership income and separately state items for the partnership
b) Calculate Bob's basis in his partnership interest at the end of the tax year. What items should Bob report on his Federal income tax return?
c) Calculate Rob's basis in his partnership interest at the end of the tax year. What items should Rob report on his Federal income tax return?
The calculation of ordinary income: 130000 - 45000 - 24,000 - 12500 - 15000 - 16000 = 17500
Separately stated items are 3000, 4500, 10000 and the guaranteed payment of 24000
See Excel for a clearer presentation of partnership basis and reporting items
Partner reporting items Rob Bob Total
Ordinary income 8,750 8,750 17,500
Guaranteed payment 24,000 24,000
Total ordinary income 32,750 8,750 41,500
Separately stated ...
The solution explains which income/loss items are separately stated for the partners including a discussion about why they are separate. Basis calculations are included as part of the solution.
Advanced Taxation Question
1. As marginal tax rates increase, the after-tax cost of a non-deductible expense will
C. Stay the same
2. A taxable corporation faces a flat 35% marginal tax rate. What is the tax savings from an additional $100,000 deduction?
3. A taxpayer who threatens to move her football team to another city if she does not receive significant tax breaks from her current town is engaging in tax planning that uses the
A. Entity variable
B. Time period variable
C. Jurisdiction variable
D. Character variable
4. Jerry is considering whether to open a new business in Florida or Costa Rica. The ultimate location of the business could impact the
A. Amount of business income that is taxable
B. Tax rates applied to the business income
C. Both the amount of business income taxed and tax rates applied to it
5. Johnson Inc sold inventory to its sole shareholder, Brad, at its FMV of $140,000 when its tax basis was $200,000 resulting in a $60,000 realized loss. The corporation's marginal tax rate for the year was 34%. Its after-tax cash flow from the sale was
6. Shirley is part of a Section 351 corporate formation. In exchange for 10% of the corporate stock, Shirley performs legal services incident to the formation of the corporation. The FMV of the stock received by Shirley is $10,000, and its par value is $500. What is Shirley's tax basis in her stock?
D. None of the above.
7. Malik transfers land with a FMV of $200,000 and a tax basis of $80,000 to a corporation in a qualifying Section 351 organization. The land is encumbered by a mortgage of $120,000, which the corporation assumes. What is the corporation's tax basis in the land?
C. $ 80,000
8. Which of the following is a true statement concerning property contributed to a corporation in a §351 transaction?
A. The receipt of boot triggers the recognition of gain.
B. Non-cash boot is valued at its adjusted basis.
C. The amount realized on the exchange excludes the relief of liabilities.
D. Section 351(a) applies to the exchange of property for the corporation's debt.
9. Moe, Larry, and Curley form The Stooges Partnership, contributing property for equal one-third interests. Moe contributed inventory with a FMV of $100,000 and a tax basis of $80,000. None of the other partners contributed any liabilities to the partnership. What is Moe's tax basis in the partnership immediately after formation?
10. Moe, Larry, and Curley form the Stooges Partnership, contributing property for a equal one-third interest. Larry contributed cash of $100,000. None of the other partners contributed any liabilities. What is Larry's tax basis in the partnership immediately after formation?
11. Michael is the President and sole shareholder of Silver, Inc. a regular corporation. The corporation reported taxable income of $1,200,000, after deducting Michael's $1,000,000 salary. If the IRS disallows $600,000 of the salary as unreasonable compensation, the corporation's regular income tax will change by an:
A. $204,000 increase
B. $175,000 increase
C. $175,000 decrease
D. $204,000 decrease
12. Which ONE of the following statements is TRUE?
A. Shareholders of S corporations prefer salary payments as opposed to distributions.
B. Shareholders of S corporations pay self-employment tax on their share of the corporation's taxable business income.
C. S corporations generally have the incentive to pay low salaries to shareholder/officers.
D. S corporations can deduct dividend payments to their shareholders.
13. Dean and Jerry formed the R&B Partnership, agreeing to share profits and losses equally. Dean will manage the business and receive a guaranteed payment of $48,000 per year. The partnership has $240,000 net income from operations for the year, before considering the guaranteed payment:
What is Dean's share of the partnership's ordinary income and guaranteed payment?
A. $ 120,000
B. $ 144,000
C. $ 168,000
D. $ 96,000
14. Which of the following statements concerning a guaranteed payment is true?
A. It is designed to compensate a partner for personal services rendered to the partnership.
B. Payroll taxes are not withheld by the partnership on guaranteed payments.
C. It is ordinary income to the partner that receives it.
D. All of these statements are true.
15. Which of the following is a true statement?
A. Fringe benefits are generally subject to income taxes.
B. Self-employed taxpayers can exclude from income the cost of any item that would be excluded as a fringe benefit if provided to an employee.
C. Most fringe benefits must meet detailed requirements before they can be excluded from the income of the recipient.
D. Generally highly compensated employees can receive a proportionately larger share of the benefit being provided to all employees.
16. Which of the following is NOT a true statement concerning deferred compensation?
A. This term encompasses any arrangement in which an employee performs current services in exchange for the promise of future payment.
B. When a partner defers a guaranteed payment, partnership taxable income decreases.
C. The employee defers income recognition until payment is actually or constructively received.
D. The employer can deduct these payments only when the employee recognizes the income.
17. Which of the following is a true statement concerning nonqualified stock options?
A. Employees must recognize the bargain element as income in the year of exercise as a capital gain.
B. Employees must hold the stock for at least one year after exercise of the option.
C. Employees bear the market risk associated with ownership of the stock.
D. Employers receive a tax deduction when the stock is exercised.
18. Tropicana Partnership has three partners. Namoli Corporation, with a June 30 year-end, has a 40% interest. Vince and Lou, both individuals with calendar tax years, each have a 30% interest. Assuming Tropicana does not adopt a tax year according to its "natural business year," what tax year must it adopt?
A. December 31
B. June 30
C. Any tax year it wishes
D. September 30
19. On December 1, 2003, Victor Company, a cash basis taxpayer, paid $45,000 for 9 months worth [December 2003 through August 2004] of rent on a warehouse it uses in its business. Victor can deduct how much of this prepayment in its 2003 tax return?
20. Which of the following are true statements concerning the reconciliation of net income for financial statement purposes with taxable income?
A. The reconciliation is done on a Schedule M-1.
B. The beginning number in the reconciliation is the entity's net income per tax.
C. Net income is increased by the entity's favorable M-1.
D. Net income is decreased by the entity's unfavorable M-1 adjustments.
21. Dreiser Corporation had net book income of $1,200,000 for the current year. In preparing its Schedule M-1 reconciliation for the year, the corporation's tax accountant noted that Dreiser had the following: Federal income tax expense=$300,000; Net capital gains=$40,000; Penalties paid to the EPA=$250,000; and municipal bond interest=$100,000. What is Dreiser's taxable income for the year?
22. Which of the following is a favorable item in the Schedule M-1 reconciliation?
A. Prepaid rental income received in the current year by an accrual method company.
B. Penalties and fines paid to government agencies
C. Interest income on municipal bonds
D. 50% of meals and entertainment expense.
23. Which of the following is a true statement?
A. A corporate tax return must be filed by the 15th day of the third month following the close of the taxable year.
B. Corporations may request an automatic nine-month extension of time to pay any balance of taxes due with the return.
C. All corporations are required to prepay 100 percent of the tax shown on their Form 1120 before the close of the tax year.
D. Under the basic annualization method a corporation's first three estimated tax payments are based on actual income for the first three months of the year.
24. Which of the following is a true statement concerning the use of tax provisions?
A. They are a means of raising revenue.
B. They are a means of increasing the cost of engaging in some behaviors.
C. They are a means of promoting certain economic consequences.
D. All of these are true statements.
25. Which of the following is a true statement concerning tax incentives.
A. Tax incentives can have a substantial impact on after-tax value.
B. They are available to a large number of taxpayers across all types of industry.
C. They are limited to exemptions of special types of income from taxation.
D. They are an inexpensive way to promote targeted economic consequences.
26. Which of the following is a true statement concerning two tax incentives that encourage research activities.
A. Research and experimentation expenditures must be capitalized and amortized over 60 months.
B. The incremental research activities credit has two parts.
C. The basic research credit equals 20 percent of cash payments to a qualified basic research organization.
D. Basic research is defined as original investigation for the advancement of scientific knowledge that has a specific commercial objective.
E. All of these are true statements.
27. Mark-Up Corporation acquires business equipment for $50,000. This is its only acquisition of tangible personal property during the year. The property is not original use property so it does not qualify for the additional bonus depreciation. Mark-Up Corporation has a taxable business loss of $(20,000) before considering any depreciation expense. What is the corporation's allowed Section 179 expense for the year?
28. XYZ, Inc. is entitled to a rehabilitation credit of $850,000 for its tax year ending June 30, 2003. The corporation's regular tax liability for the year is $745,000. Which of the following statements is true?
A. XYZ, Inc. should receive a tax refund for the current year.
B. The portion of the rehabilitation credit that cannot be used this year will be lost.
C. The credit is higher if the owner restores a certified historic structure.
D. The credit is available for restoration of a building that is at least ten years old.
29. Which of the following is NOT always an increase to alternative minimum taxable income (AMTI)?
A. Percentage depletion.
C. Private activity bond interest
D. All of the above must increase AMTI.
30. Darden Partnership purchased business equipment in 2003 and elected to expense the maximum amount allowed under Section 179. This amount is deducted by the partnership in computing the partnership ordinary business income.
31. Credits earned by a partnership or S corporation are passed through to the partners or shareholders for use in their own personal tax returns.
32. Partners' capital accounts are decreased by their shares of loss items.
33. Which of the following is a true statement concerning an S corporation's allocation of items to shareholders?
A. An S corporation must maintain separate capital accounts for each shareholder.
B. An S corporation makes its allocations with respect to each share of stock
C. Built-in gain or loss to must be allocated to the contributing shareholder.
D. The character of any recognized gain or loss relating to contributed property is determined by reference to the shareholder's pre-contribution use of the property.
34. Popovic Corporation an S corporation, has E&P of $280,000 and reports the following for the current year:
Gross sales receipts:$220,000
Interest income: $60,000
The company's excess net passive income is:
A. $ 80,000.
35. A dividend is any distribution of cash or property made by a corporation to its shareholders to the extent the distribution is paid out of either current or accumulated earnings and profits.
36. Tax-exempt interest will cause earnings and profits to be less than taxable income
37. A nondeductible capital loss is one of the adjustments to taxable income in the E&P computation.
38. Scott Corporation made a $10,000 distribution to its shareholders when its current E&P was $12,000, and its accumulated E&P at the beginning of the year was a deficit of $56,000. The entire distribution is a dividend.
39. Carolyn owns all the common stock of Deland Corporation. During the year, the corporation distributes appreciated property to her in lieu of a cash dividend. The corporation must recognize gain on this distribution.
40. Accumulating the earnings of a corporation within the entity eliminates the "double tax" normally imposed on such earnings.