Circle the best answer for each of the following questions.
21. In order to “carry on” a business, an entity must:
a. have one or more associates b. have assets
c. engage in some business activity d. all of the above
22. Under the check the box regulations, a business entity with two or more owners may elect to be taxed as a:
a. sole proprietorship b. C corporation c. Partnership d. (b) or (c)
23. A sole-proprietorship business reports $100,000 of self-employment income on Schedule C. The amount of such income subject to the Social Security portion of the self-employment tax will be:
a. $50,000 b. $92,350 c. $100,000 d. $102,000
24. A sole-proprietorship business reports $100,000 of self-employment income on Schedule C. The amount of such income subject to the Medicare portion of the self-employment tax will be:
a. $50,000 b. $92,350 c. $100,000 d. $102,000
25. Bill Small, a self-employed plumber, made $2,500 of contributions to a local university by writing a check from his business account. This contribution will be reported by Bill on:
a. Schedule A, Form 1040 b. Schedule B, Form 1040 c. Schedule SE, Form 1040
d. Either (a) or (b), at the option of the taxpayer
26. In exchange for a one-third interest in a partnership, Ally Harris contributed land worth $80,000 (Ally’s adjusted basis in the land was $60,000). Ally’s gain recognized on the contribution of the land to the part-nership, and her basis in the partnershjp interest, would be:
a. $0 and $60,000 b. $0 and $80,000 c. $20,000 and $60,000 d. $20,000 and $80,000
27. During the current year, ABC Partnership had $300,000 ordinary business revenues, $180,000 ordinary business expenses, a $60,000 guaranteed payment to A and a $30,000 guaranteed payment to B, and
$10,000 dividend income. Partner C’s one-third share of the ordinary income of the partnership, before considering specially allocated items, is:
a. $10,000
c. $30,000 d. $40,000
28. Which of the following items would be part of ordinary partnership income, and thus not treated as a separately stated item?
a. Charitable contributions
b. Depreciation recapture under Code Sec. 1245 c. Short-term capital gains
d. None of the above (all are separately stated items)
29. Allen Ross is a shareholder-employee in a qualifying S corporation. For payroll tax purposes, Allen will be:
a. treated as a self-employed person b. treated as a partner in a large partnership c. treated as an employee of the S corporation d. none of the above
30. Bleaker Corporation, a regular C corporation, incurred a $40,000 loss in its fi rst year of doing business. This amount includes a $36,000 operating loss and a $4,000 short-term capital loss. Bob Bleaker owns 100 percent of Bleaker Corporation. As a result of this loss, Bob Bleaker will report on his Form 1040 for the year:
a. only the capital loss b. only the operating loss
c. both the capital loss and the operating loss d. neither the capital loss nor the operating loss
Problems
31. Melva Rhymer, a self-employed electrician, has Schedule C income of $200,000 during the year 2008.
What is Melva’s self-employment tax liability?
32. Refer to Problem 31. What may Melva deduct on her Form 1040 in regards to the self-employment tax paid? Where is this amount reported?
33. Sam “22” Elliott gambles full time solely for his own account. May he deduct his gambling losses as a deduction from gross income?
34. Susan Whitley purchased 500 acres of land in a rapidly growing part of the county. She anticipates holding the land for fi ve years and selling it at a large profi t. Her only expenditure is for annual real estate taxes on the land. Is Susan carrying on a trade or business?
35. The ABC Partnership is owned equally by Apple, Banana, and Citrus. During the year ABC has ordinary partnership income of $300,000 before considering a $60,000 payment to Apple for his services and a
$30,000 payment to Banana as interest on his capital investment. What is each partner’s share of partner-ship income for the year, including any guaranteed payments?
36. During 2008, Larry Ramis had the following items of income and expenditures in his sole proprietor-ship business: $450,000 gross receipts, $20,000 dividends on business stock investments, $4,000 capital gain on the sale of stock of a supplier, $260,000 cost of goods sold, $40,000 utilities expenses, $70,000 salaries expenses, $40,000 withdrawals by Larry, and $4,000 cash given from the business account to a local charity. What is Larry’s Schedule C business income or loss, a fi gure that is also used to compute the self-employment tax liability?
37. Joyce Woodward owns land with an adjusted basis of $200,000 and a fair market value of $300,000. The land is also subject to a $240,000 loan. Which, if any, of the following transactions would require Joyce to report gain on contributing such property to the specifi ed entity: (a) the contribution is to Corporation A for 90 percent of the outstanding stock of A; (b) the contribution is to WXY partnership for a one-third partnership interest.
38. Sandra Barnett owns 70 percent of the outstanding stock of Belco Corporation; the remaining shares are owned by her children. During the current year, Belco paid a salary of $130,000 to Sandra. If Belco is a regular C corporation, the IRS is likely to argue that the salary payment is too small. On the other hand,
if Belco is an S corporation, the IRS is likely to argue that the salary payment is too large. Explain this paradox.
39. During 2008, Larry Barlow had the following items of income and expenditures in his sole proprietorship business: $380,000 gross receipts, $12,000 dividends on business stock investments, $14,000 capital loss on the sale of stock of a supplier, $210,000 cost of goods sold, $40,000 advertising expenses, $100,000 salaries expenses (which includes a $36,000 salary paid to himself), and $7,000 cash given from the busi-ness account to a local charity. What is Larry’s self-employment income for 2008?
40. Sally Wilkinson contributes land (adjusted basis of $55,000 and fair market value of $100,000) to WXY Partnership in exchange for a one-third partnership interest. In addition, the partnership assumes Sally’s
$90,000 liability on the land. Determine the following: (1) taxable gain (if any) reported by Sally, (2) tax basis of Sally’s partnership interest, and (3) tax basis of the land to WXY Partnership.
41. During the current year, DEF Partnership (owned equally by D, E and F) had $150,000 ordinary business revenues, a $3,000 capital loss, $80,000 ordinary business expenses, a $20,000 charitable deduction, and
$20,000 of dividend income. In addition, DEF made a guaranteed salary payment of $40,000 to D, and each of the three partners withdrew $10,000 of non-guaranteed payments. Determine each partner’s share of ordinary partnership income, guaranteed payments, and specially allocated items.
42. Sue McCain is a 35-percent owner/employee in Baker Company, a qualifying S corporation. During the current year, the S corporation reported $100,000 of ordinary income. Determine Sue’s self-employment tax liability for the year, assuming that Sue’s “salary” is $50,000.
43. Malvern Company has a net income in 2008 of $180,000, before considering the $130,000 payments to its owner, Melva Malvern. Melva is married to Jim Malvern, and they do not have any children or other dependents; thus, they qualify for two exemption deductions worth a total of $7,000. Melva and Jim are both 45 years of age. Their itemized deductions for the year total $17,500 under all scenarios.
Required: Determine the following amounts, assuming that Malvern is a self-employed individual. Ignore any federal unemployment tax liability (FUTA), but do consider any allowable expense deductions for the FICA and/or self-employment tax.
Self-employment taxes paid $ ___________
Federal income taxes paid by Melva & Jim Malvern ___________
Total taxes paid $ ___________
44. Assume the same facts as Problem 43, except that Malvern Company is a corporation, and Melva and Jim are the only shareholders. Assume that $80,000 of the $130,000 payment to Melva is a reasonable salary, and the remaining $50,000 is a taxable dividend.
FICA taxes paid in by Melva as an employee $ ___________
FICA taxes paid by Malvern Co. on Melva’s salary ___________
Federal income taxes paid by Malvern Co. ___________
Federal income taxes paid by Melva & Jim Malvern ___________
Total taxes paid $ ___________
45. Assume the same facts as Problem 43, except that the entire $130,000 payment to Melva represents a reasonable salary; there are no dividend payments.
FICA taxes paid in by Melva as an employee $ ___________
FICA taxes paid by Malvern Co. on Melva’s salary ___________
Federal income taxes paid by Malvern Co. ___________
Federal income taxes paid by Melva & Jim Malvern ___________
Total taxes paid $ ___________
Hints: Do not forget that (1) one-half of the self-employment tax paid is a deduction in determining the taxable income of the sole proprietor, (2) the corporation and the employee share the FICA tax liability, and (3) the corporation’s $180,000 income has not been reduced by the salary deduction or the company’s share of the FICA taxes paid. Ignore FUTA and SUTA taxes for purposes of all computations.