Advanced Topics in Individual and Pass-through Taxation Quiz
Which of the following is considered a pass-through entity for tax purposes?
A) Corporation
B) LLC (Limited Liability Company)
C) C-Corporation
D) S-Corporation
In what year did the IRS begin offering the S-Corporation election for small businesses?
A) 1913
B) 1958
C) 1982
D) 1997
Which of the following is true regarding the taxation of S-Corporations?
A) They are taxed at the corporate level.
B) They file a Form 1120 for taxes.
C) Shareholders are taxed on income regardless of distributions.
D) S-Corporation shareholders are not required to report income on their personal tax returns.
What form does an LLC file to elect to be taxed as an S-Corporation?
A) Form 1065
B) Form 2553
C) Form 8832
D) Form 1120
Which of the following is a key benefit of a pass-through entity taxation structure?
A) No self-employment taxes on all income
B) Corporate tax deduction eligibility
C) Avoidance of double taxation
D) Taxation only at the corporate level
Which of the following forms must an S-Corporation file to report its income and distributions?
A) Form 1065
B) Form 1120S
C) Form 1040
D) Form 8879
What type of income is passed through to the shareholders of an S-Corporation?
A) Only salary income
B) Only capital gains
C) Only interest income
D) All types of income earned by the corporation
The income of a pass-through entity is taxed at the:
A) Corporate level
B) Shareholder level
C) Both corporate and shareholder level
D) State level only
What is the maximum number of shareholders an S-Corporation can have under current IRS rules?
A) 50
B) 100
C) 200
D) 500
A key difference between an S-Corporation and a partnership is:
A) S-Corporations have limited liability; partnerships do not.
B) Partnerships must file an annual return.
C) S-Corporation shareholders can take advantage of loss deductions.
D) Partners in a partnership are subject to double taxation.
What is the effect of the self-employment tax on income received from a pass-through entity?
A) The owner of the pass-through entity is subject to self-employment tax on their share of the income.
B) Pass-through income is exempt from self-employment tax.
C) The self-employment tax is only applicable to dividends.
D) The self-employment tax is always deducted at the corporate level.
How does an LLC taxed as a partnership differ from an LLC taxed as an S-Corporation?
A) The LLC taxed as a partnership does not file taxes at the entity level, while the LLC taxed as an S-Corporation does.
B) An LLC taxed as an S-Corporation allows its owners to avoid self-employment taxes.
C) The LLC taxed as a partnership is not eligible for income deductions.
D) LLCs taxed as S-Corporations cannot be formed in most states.
What is a “K-1” form used for in a pass-through entity?
A) To report wages paid to employees
B) To report the individual’s share of the entity’s income, deductions, credits, and other relevant financial information
C) To calculate the corporation’s tax liabilities
D) To file the corporate tax return
Which of the following tax credits can pass-through entities potentially allocate to their shareholders?
A) Corporate tax credits
B) Renewable energy credits
C) Education tax credits
D) Foreign tax credits
Which of the following is generally considered a disadvantage of pass-through taxation for individuals?
A) Potential for double taxation
B) The requirement to pay self-employment taxes on income
C) Simplicity in tax filing
D) Limited access to tax credits
When can an S-Corporation terminate its status and revert to being a C-Corporation?
A) At any time upon shareholder agreement
B) After 10 years of operation
C) Only by filing a request with the IRS
D) Upon dissolution of the company
What percentage of an LLC’s profits must be allocated to members for taxation purposes?
A) 100%
B) 75%
C) 50%
D) 25%
Which tax form does an individual use to report their share of income from a pass-through entity?
A) Form 1040
B) Form 1065
C) Form 1120
D) Form 8832
How are distributions from an S-Corporation taxed?
A) As ordinary income
B) As capital gains
C) As a return of capital
D) Distributions are tax-free
The IRS generally requires pass-through entities to:
A) Pay estimated quarterly taxes on behalf of the owners
B) Report all tax liability at the entity level
C) Distribute profits equally among all owners
D) Provide annual financial statements to shareholders
In the case of a pass-through entity, what happens if the entity incurs a loss?
A) The loss is distributed equally among all shareholders or members
B) The entity pays the taxes on the loss
C) The loss is carried forward indefinitely
D) The loss cannot be used to offset the shareholders’ income
How is income from an S-Corporation treated for tax purposes?
A) It is taxed once at the corporate level and again at the shareholder level.
B) It is taxed only at the shareholder level.
C) It is taxed only at the corporate level.
D) It is not taxed at all.
Which of the following entities is not eligible for pass-through taxation?
A) Limited Liability Company (LLC)
B) S-Corporation
C) C-Corporation
D) Partnership
When a partner in a partnership receives a guaranteed payment, how is it taxed?
A) As dividend income
B) As self-employment income
C) As capital gains
D) It is tax-exempt
What is the general tax treatment of a “distribution” from a pass-through entity?
A) It is treated as taxable income unless it is a return of capital.
B) It is always taxable as ordinary income.
C) It is treated as non-taxable, as long as it doesn’t exceed the partner’s share of profits.
D) It is always subject to self-employment tax.
What happens when a partnership has a loss in a tax year?
A) The loss is passed through to the partners and can offset their other income.
B) The loss is carried forward indefinitely.
C) The loss is taxed at the partnership level.
D) The loss is ignored for tax purposes.
An individual shareholder of an S-Corporation is entitled to claim deductions for:
A) Only wages received from the corporation
B) A percentage of corporate income, loss, and deductions
C) All corporate income, loss, and deductions
D) Only non-taxable income
Which of the following is true about a limited liability company (LLC) treated as a partnership for tax purposes?
A) The LLC itself must pay taxes on its income.
B) The LLC members pay taxes on their share of the income.
C) LLC members are taxed only on their contributions.
D) LLC members do not have to file a tax return.
What is the key feature of a pass-through entity that prevents double taxation?
A) The entity is not taxed at the individual level.
B) The entity’s income is passed directly to the owners to be taxed on their personal tax returns.
C) The entity is exempt from paying taxes altogether.
D) Only capital gains are passed through to the owners.
What is a major tax advantage of investing in a pass-through entity for an individual taxpayer?
A) The ability to avoid paying self-employment tax on all income
B) Pass-through income is taxed at the corporate tax rate
C) The ability to utilize tax losses to offset other income
D) The income is never taxed at the state level
Which of the following is a requirement for an LLC to elect to be taxed as an S-Corporation?
A) The LLC must have at least 50 members.
B) The LLC must submit Form 1065.
C) The LLC must meet the IRS eligibility requirements for S-Corporations, such as the number and type of members.
D) The LLC must operate in multiple states.
How are distributions of appreciated property from a partnership treated for tax purposes?
A) As capital gains.
B) As ordinary income.
C) As a return of capital.
D) As tax-exempt income.
What tax form does a partnership file to report its income, deductions, and distributions to its partners?
A) Form 1065
B) Form 1120
C) Form 1040
D) Form 8832
If a partnership sells a capital asset, how is the gain or loss allocated to the partners?
A) It is allocated based on the partnership’s percentage of ownership.
B) It is not allocated to the partners.
C) It is allocated evenly among all partners.
D) It is allocated only to partners who are actively involved in the business.
Which of the following is true about guaranteed payments made to a partner in a partnership?
A) They are not deductible by the partnership.
B) They are subject to self-employment tax for the partner.
C) They are considered dividends for tax purposes.
D) They are considered distributions of profits.
Which type of income from a pass-through entity is generally not subject to self-employment tax?
A) Guaranteed payments
B) Dividends
C) Rental income
D) Salary paid to the owner
A limited partnership consists of general and limited partners. The general partners have:
A) Limited liability for the partnership’s debts.
B) No control over the operations of the business.
C) Unlimited liability for the partnership’s debts.
D) No share of income or loss.
Which of the following is a tax advantage of an S-Corporation compared to a C-Corporation?
A) S-Corporations avoid self-employment taxes entirely.
B) S-Corporations are taxed on a lower rate of income than C-Corporations.
C) S-Corporations are not subject to double taxation.
D) S-Corporations can issue both common and preferred stock.
How does the IRS treat income that a partner receives from the partnership as compensation for services?
A) It is treated as ordinary income, subject to self-employment tax.
B) It is treated as a dividend.
C) It is treated as capital gains.
D) It is treated as a tax-exempt income.
In a partnership, what is the treatment of distributions made to partners from the partnership’s capital account?
A) The distribution is subject to self-employment tax.
B) The distribution is tax-free if it does not exceed the partner’s capital account.
C) The distribution is taxable as ordinary income.
D) The distribution is subject to corporate tax.
How are losses from a pass-through entity treated on an individual tax return?
A) Losses are only deductible if they exceed a certain threshold.
B) Losses can offset other income, subject to certain limitations such as the passive activity loss rules.
C) Losses are never deductible.
D) Losses can be deducted only against future income from the same pass-through entity.
What happens if a pass-through entity owner’s personal tax situation changes, resulting in the need for amended returns?
A) The owner must submit a new entity-level tax return.
B) The entity does not need to amend any returns, but the owner must file an amended personal return.
C) The entity must submit an amended return, and the owner may file a new personal tax return.
D) The entity will file an amended return and notify all partners about the changes.
A member of an LLC taxed as a partnership receives a distribution of property. How is this property treated for tax purposes?
A) The property is not taxable until sold.
B) The property is treated as ordinary income.
C) The property is taxed as a capital gain, based on the fair market value at the time of the distribution.
D) The property is treated as a return of capital, with no tax liability.
Which of the following is a feature of a “qualified joint venture” for tax purposes?
A) It is taxed as a C-Corporation.
B) The owners are subject to pass-through taxation but avoid self-employment tax.
C) The owners are treated as partners for tax purposes but are exempt from the partnership filing requirements.
D) The owners can choose to file as an S-Corporation.
In a partnership, what happens if the partnership does not have enough basis to deduct a partner’s share of a loss?
A) The loss is deferred until the partner has enough basis in a future year.
B) The partner is disqualified from deducting the loss.
C) The partnership can carry the loss back to a prior year.
D) The loss is carried forward to the next tax year for the partnership.
What is the tax treatment of an LLC’s income if it does not elect to be taxed as an S-Corporation or C-Corporation?
A) The LLC’s income is taxed as income on the LLC’s owner(s) personal tax return.
B) The LLC’s income is taxed at both the entity and the owner level.
C) The LLC pays taxes at the entity level and does not pass the income to owners.
D) The LLC is taxed only if it has more than $1 million in income.
How are loans from an LLC to its members treated for tax purposes?
A) They are treated as taxable income.
B) They are not taxable, and interest is deductible for the LLC.
C) They are considered distributions and are subject to capital gains tax.
D) They are treated as a salary and subject to payroll taxes.
Which of the following is true regarding the treatment of guaranteed payments to LLC members?
A) Guaranteed payments are subject to self-employment tax.
B) Guaranteed payments are always treated as dividends.
C) They are not considered income for the member.
D) They are deducted from the LLC’s taxable income.
When a partnership elects to terminate, how is the partnership’s final year treated for tax purposes?
A) The partnership is required to pay taxes on all outstanding income.
B) The partnership must allocate the final year’s income and deductions to partners in proportion to their ownership.
C) The partnership is exempt from filing any final tax forms.
D) The partnership can choose to pass all income to the partners in the next tax year.
What is the primary tax consideration when an LLC member disposes of their ownership interest in the LLC?
A) The disposition is always treated as a capital gain.
B) The disposition is treated as ordinary income, subject to self-employment tax.
C) The disposition is treated as a taxable event, with any gain or loss calculated based on the member’s basis in the LLC.
D) The member must continue reporting income from the LLC even after the disposition.
When an LLC has multiple members, how is the income generally allocated among the members?
A) Based on the ownership percentage unless the operating agreement specifies otherwise.
B) It is divided equally, regardless of ownership interest.
C) It is allocated based on the hours worked by each member.
D) It is allocated solely based on the initial capital contributions of the members.
Under what circumstances can an S-Corporation elect to use a fiscal year rather than a calendar year for tax reporting purposes?
A) The S-Corporation can always choose any fiscal year.
B) Only if it operates on a seasonal business model.
C) If it can prove to the IRS that it has a valid business reason for a fiscal year election.
D) Only if it has multiple shareholders from different countries.
Which of the following is a tax advantage of pass-through taxation for individual taxpayers?
A) They avoid any federal income tax.
B) They are not subject to corporate-level taxes.
C) They can exclude all business-related income from their tax returns.
D) They receive preferential treatment for all types of income.
When an individual shareholder in an S-Corporation sells their shares, the sale is taxed as:
A) Ordinary income.
B) Capital gains.
C) Self-employment income.
D) Dividends.
If a pass-through entity distributes property to an owner, what is the tax consequence to the owner?
A) The distribution is always tax-free.
B) The owner must pay income tax on the fair market value of the property.
C) The owner must recognize income only if the property has appreciated.
D) The owner is not taxed until they sell the property.
Which of the following is a requirement for an LLC to be taxed as a partnership?
A) The LLC must have at least two members.
B) The LLC must file Form 1120.
C) The LLC must have a minimum capital of $500,000.
D) The LLC must be engaged in a single business activity.
In the context of pass-through taxation, how is the net income of a partnership generally distributed to the partners?
A) In equal amounts to all partners.
B) Based on the ownership percentage unless otherwise agreed upon in the partnership agreement.
C) Based on the capital contributions of the partners.
D) Equally based on the hours worked by each partner.
What type of income is typically passed through to the shareholders of an S-Corporation?
A) Only income from ordinary business activities.
B) Only income from long-term capital gains.
C) All income, including capital gains, dividends, and ordinary business income.
D) Only interest income from business operations.
What happens if an LLC taxed as an S-Corporation incurs a loss in a tax year?
A) The loss is passed through to the members and can offset their other taxable income, subject to limitations.
B) The LLC must pay taxes on the loss.
C) The loss is not passed through to the members.
D) The members can carry the loss forward as a deduction on the next year’s return.
How does an S-Corporation avoid double taxation on its income?
A) By passing all income directly to shareholders to be taxed at the individual level.
B) By applying tax credits to income at the corporate level.
C) By filing for bankruptcy.
D) By paying all profits out as dividends to the shareholders.
If a partner in a partnership sells their interest in the partnership, how is the transaction generally taxed?
A) As ordinary income, with self-employment tax.
B) As capital gains, based on the difference between the sale price and the partner’s basis in the partnership.
C) As a dividend distribution.
D) As a return of capital.
What is the main tax consequence of an S-Corporation distributing dividends to its shareholders?
A) The dividend is subject to self-employment tax.
B) The dividend is tax-exempt for shareholders.
C) The dividend is taxed as ordinary income to shareholders.
D) The dividend is taxed at the corporate tax rate.
Which of the following is an example of a special allocation in a partnership?
A) Allocating income based on ownership percentages.
B) Allocating income based on the hours worked by each partner.
C) Allocating capital gains and losses according to each partner’s share of partnership profits.
D) Allocating guaranteed payments to specific partners.
What is the tax impact of a partnership allocating losses to its partners?
A) The partners can use the losses to offset income from other sources, subject to limitations.
B) The partnership must pay taxes on the losses.
C) The partners must carry the losses forward to future years.
D) The losses can only be deducted if the partnership is dissolved.
Which of the following is true about the distribution of property by a partnership to its partners?
A) Property distributions are always taxable at the fair market value.
B) Distributions of property to partners may trigger gain recognition depending on the type of property and the partner’s basis.
C) Distributions of property are never taxable.
D) Property distributions are taxable only if the partnership has profit in the year of distribution.
When a member of an LLC sells their interest in the LLC, how is the gain typically taxed?
A) As self-employment income.
B) As a return of capital.
C) As a capital gain, based on the difference between the selling price and the member’s basis in the LLC.
D) As ordinary income.
What is the treatment of a partner’s share of guaranteed payments in a partnership for tax purposes?
A) They are treated as dividend income.
B) They are subject to self-employment tax, but not income tax.
C) They are treated as ordinary income and subject to self-employment tax.
D) They are tax-exempt.
Which of the following tax benefits does a partnership enjoy under the pass-through taxation system?
A) The partnership does not have to file a tax return.
B) The partnership avoids paying corporate income taxes.
C) The partnership’s income is taxed at the corporate level.
D) The partnership can deduct losses from other investments.
How are income and losses allocated in an LLC taxed as a partnership?
A) In proportion to the ownership interests unless the operating agreement specifies otherwise.
B) Based on the work performed by each member.
C) Based on the capital contributions of each member.
D) The income is evenly divided among the members, regardless of ownership percentage.
Which of the following is a limitation when claiming a deduction for losses in a pass-through entity?
A) The loss cannot exceed the owner’s share of the entity’s capital.
B) The loss cannot exceed the owner’s taxable income from other sources.
C) The loss is disallowed if the owner has more than 25% ownership.
D) The loss can be carried forward indefinitely.
Which form must a partnership file to report its income, deductions, and allocation of profit or loss to partners?
A) Form 1120S
B) Form 1065
C) Form 1040
D) Form 990
If a pass-through entity distributes a portion of its property to a shareholder, how is the distribution generally treated for tax purposes?
A) As a tax-free return of capital if the distribution is less than the shareholder’s basis.
B) As taxable income at the fair market value of the property, subject to capital gains tax.
C) As a taxable event, but only if the property has appreciated in value.
D) As dividend income, subject to dividend tax rates.
What is the primary tax advantage of an LLC compared to a corporation?
A) The LLC is taxed at a lower rate than corporations.
B) The LLC avoids all federal taxes on business income.
C) The LLC is generally not subject to self-employment tax on income.
D) The LLC is a pass-through entity, meaning business income is taxed at the owners’ individual rates.
When an LLC elects to be taxed as an S-Corporation, how is the business income typically taxed?
A) At the corporate level and then again at the individual level.
B) At the individual level, with no corporate taxes paid.
C) At the individual level, with self-employment taxes applied to all income.
D) At the corporate level, with no taxes paid at the individual level.
How does the IRS define a “passive activity” for tax purposes?
A) Activities that result in income that is not subject to self-employment tax.
B) Activities where the taxpayer does not materially participate in the operations.
C) Activities that are not conducted for profit.
D) Activities where the taxpayer invests but does not actively manage the business.
Which of the following best describes an LLC that elects to be taxed as an S-Corporation?
A) The LLC is taxed as a corporation and all income is taxed at the corporate level.
B) The LLC files an annual return for taxes but does not pass income to owners.
C) The LLC passes all income, deductions, and credits to the owners, who report them on their personal tax returns.
D) The LLC is taxed as a partnership, but it does not distribute income to owners.
When a partner in a partnership has an increase in their share of liabilities, what happens to their basis in the partnership?
A) Their basis increases by the amount of the increase in liabilities.
B) Their basis decreases by the amount of the increase in liabilities.
C) Their basis is unaffected by changes in liabilities.
D) Their basis is adjusted based on the partnership’s income.
What happens when a pass-through entity reports losses but the owner does not have enough basis to deduct them?
A) The losses can still be deducted in the future when the owner’s basis increases.
B) The losses are completely lost and cannot be carried forward.
C) The losses can be deducted, but only if the entity is liquidated.
D) The losses are deducted from the entity’s taxable income, but the owner is not affected.
Which of the following is true about the allocation of income, deductions, and credits in a partnership?
A) They are always divided equally among the partners.
B) They are allocated based on each partner’s ownership percentage unless the partnership agreement specifies otherwise.
C) They are allocated solely based on the capital contributions of each partner.
D) They are allocated equally based on the work performed by each partner.
If an LLC taxed as a partnership is dissolved, how is the distribution of assets typically treated for tax purposes?
A) The distribution is treated as a taxable event and gains are recognized based on the fair market value of assets distributed.
B) The assets are distributed without any tax consequences.
C) The distribution is not taxable if the LLC has been in business for less than five years.
D) The distribution is treated as a return of capital and is not taxed.
Which of the following is true about the self-employment tax for partners in a partnership?
A) All partnership income is subject to self-employment tax.
B) Only guaranteed payments are subject to self-employment tax.
C) Partners are exempt from self-employment tax on income passed through from the partnership.
D) Only capital gains from partnership investments are subject to self-employment tax.
When a partner in a partnership receives a distribution of cash, how is it typically treated for tax purposes?
A) As taxable income to the partner at the fair market value of the cash.
B) As a tax-free return of capital up to the partner’s basis in the partnership.
C) As a taxable dividend.
D) As a non-taxable event, regardless of the partner’s basis.
Which of the following is a requirement for an S-Corporation to avoid paying corporate-level taxes?
A) All income must be distributed to shareholders.
B) The S-Corporation must have no more than 100 shareholders, all of whom must be U.S. citizens.
C) The S-Corporation must file as a partnership.
D) The S-Corporation must not operate in more than one state.
If an LLC taxed as a partnership incurs a loss in the current tax year, how does this loss affect the member’s tax return?
A) The loss can offset the member’s income from other sources, subject to the basis and at-risk limitations.
B) The loss is carried forward to the next tax year, but cannot be used to offset other income.
C) The loss can be deducted directly against the member’s capital gains.
D) The loss must be reported as income in the next tax year.
How does a partnership generally treat its income for tax purposes?
A) The partnership is taxed on its income, and then the partners pay taxes on their share.
B) The partnership’s income is passed through to the partners, who report it on their individual tax returns.
C) The partnership pays taxes on all income, and partners are exempt from reporting.
D) The partnership’s income is subject to tax, but only if the partners are not actively involved in the business.
Which of the following types of income would an S-Corporation report on its shareholder’s individual tax returns?
A) Ordinary business income.
B) Interest income from business operations.
C) Dividends from investments.
D) Capital gains.
When does a partnership file its tax return?
A) On April 15, the same as individual tax returns.
B) By the 15th day of the 4th month following the end of the partnership’s fiscal year.
C) At the same time the partners file their personal tax returns.
D) By December 31, regardless of the fiscal year.
What is the tax treatment of income generated by a partnership but not distributed to the partners?
A) It is taxed to the partnership, and no tax is due from the partners.
B) It is taxed to the partnership but is not reported on the partners’ individual tax returns.
C) It is passed through to the partners, even if not distributed, and taxed on their individual returns.
D) It is not subject to tax until it is distributed.
What is the primary disadvantage of an LLC taxed as an S-Corporation?
A) The LLC must comply with more stringent reporting requirements than a partnership.
B) The LLC cannot pass through losses to its members.
C) The LLC is subject to corporate-level tax on income.
D) The LLC must maintain corporate formalities and issue stock.
Which of the following describes the tax treatment of guaranteed payments in a partnership?
A) Guaranteed payments are always tax-free to the recipient.
B) Guaranteed payments are deducted from the partnership’s income and taxed as ordinary income to the recipient.
C) Guaranteed payments are treated as dividends to the recipient.
D) Guaranteed payments are subject to corporate tax rates.
In a partnership, what happens if one partner contributes property instead of cash to the partnership?
A) The contribution is treated as income to the partnership.
B) The partner may recognize gain depending on the fair market value of the property.
C) The contribution is always tax-free to the partner and the partnership.
D) The property is treated as a loan to the partnership.
How is income from a passive activity treated on an individual’s tax return?
A) It is subject to self-employment tax.
B) It is subject to regular income tax but not self-employment tax.
C) It can offset income from other active businesses.
D) It is not subject to any tax.
In a partnership, what happens if a partner’s capital account is below zero?
A) The partner is no longer considered a member of the partnership.
B) The partner must immediately contribute additional capital.
C) The partner will be allocated a share of partnership profits to bring the account to zero.
D) The partner is considered to have a “negative basis” and cannot deduct further partnership losses.
If a partnership disposes of an asset that has appreciated in value, how is the gain typically allocated to the partners?
A) The gain is allocated to the partners equally.
B) The gain is allocated according to each partner’s ownership percentage, unless otherwise specified in the partnership agreement.
C) The gain is allocated only to the partner who owns the asset.
D) The gain is taxed at the corporate level and not passed through to the partners.
How does an S-Corporation handle the tax treatment of shareholder distributions?
A) Distributions are tax-free if they do not exceed the shareholder’s basis in the stock.
B) Distributions are subject to tax at the corporate tax rate.
C) Distributions are taxed as ordinary income to shareholders, regardless of basis.
D) Distributions are considered capital gains, even if the shareholder’s basis is zero.
What is the effect of a partner receiving a non-liquidating distribution from a partnership?
A) The distribution is taxable as income.
B) The distribution is not taxable unless it exceeds the partner’s basis in the partnership.
C) The distribution is always taxed as capital gain.
D) The distribution is subject to self-employment tax.
When can a partnership elect to change its tax classification to an S-Corporation?
A) Any time during the year.
B) Only at the end of the fiscal year.
C) When the partnership has more than 100 partners.
D) When the partnership has been operating for at least five years.
How is income from rental activities typically treated for tax purposes for an individual?
A) It is always considered self-employment income.
B) It is considered passive income and subject to special tax rules.
C) It is excluded from the individual’s taxable income.
D) It is taxed at the corporate income tax rate.
In a partnership, how is a partner’s share of guaranteed payments treated for tax purposes?
A) As ordinary income and subject to self-employment tax.
B) As tax-exempt income.
C) As capital gains, subject to long-term capital gains tax rates.
D) As dividend income.
When an LLC elects to be taxed as a partnership, which of the following tax treatment applies?
A) The LLC is treated as a separate taxable entity and pays taxes at the corporate level.
B) The LLC passes its income and deductions through to its members, who report it on their individual tax returns.
C) The LLC’s income is taxed at a flat rate regardless of the owners’ individual tax brackets.
D) The LLC is not required to file any tax forms if it has no income.
What is the primary reason that S-Corporations are favored by many small business owners over C-Corporations?
A) S-Corporations avoid the double taxation that occurs with C-Corporations.
B) S-Corporations are not subject to any filing requirements.
C) S-Corporations do not have any formal ownership structure.
D) S-Corporations can issue unlimited shares to investors.
How is a partner’s basis in a partnership affected by their share of partnership income?
A) The partner’s basis increases by the amount of income allocated to them.
B) The partner’s basis decreases by the amount of income allocated to them.
C) The partner’s basis is unaffected by the income.
D) The partner’s basis increases by the amount of guaranteed payments received.
Which of the following best describes a guaranteed payment in a partnership?
A) A payment made to a partner regardless of the partnership’s profits or losses.
B) A payment made to a partner based on their capital contribution.
C) A payment made to a partner as a share of the partnership’s profits.
D) A payment made only to limited partners, not general partners.
What happens when an S-Corporation distributes property to a shareholder?
A) The distribution is taxable as a dividend to the shareholder.
B) The distribution is tax-free if the shareholder’s basis in the stock is greater than or equal to the property’s fair market value.
C) The distribution is subject to self-employment tax.
D) The distribution may result in a taxable gain if the fair market value of the property exceeds the shareholder’s basis in the stock.
What is a major tax advantage of an S-Corporation over a C-Corporation?
A) An S-Corporation avoids double taxation on income, while a C-Corporation’s income is taxed at both the corporate and individual levels.
B) An S-Corporation has a lower corporate tax rate.
C) An S-Corporation can issue preferred stock, while a C-Corporation cannot.
D) An S-Corporation can accumulate unlimited retained earnings without penalty.
How is a distribution from a partnership to a partner treated for tax purposes?
A) As taxable income to the partner.
B) As a tax-free return of capital up to the partner’s basis in the partnership.
C) As a taxable dividend subject to dividend tax rates.
D) As taxable only if the partnership has capital gains in the year of distribution.
Which of the following partners would be considered a “materially participating” partner for the purpose of the passive activity loss rules?
A) A partner who works only 20 hours per week in the business.
B) A partner who owns more than 50% of the partnership and works actively in the business.
C) A partner who is only a limited partner with no active role in the business.
D) A partner who is involved in the business but does not make management decisions.
In a partnership, how are nonrecourse liabilities typically allocated among the partners for tax purposes?
A) Based on the partners’ ownership percentages.
B) Based on the partnership’s capital structure.
C) Based on the amount of capital contributed by each partner.
D) Nonrecourse liabilities are not allocated to the partners.
How does a partnership determine the amount of income to allocate to each partner?
A) Income is allocated based on the capital contributions of each partner.
B) Income is allocated equally to all partners.
C) Income is allocated according to the partnership agreement, which may vary from the ownership percentage.
D) Income is allocated to the partner with the most involvement in the business operations.
When a partnership is formed, which of the following is true about the tax treatment of initial capital contributions?
A) Contributions of cash or property are generally not taxable events.
B) Capital contributions are subject to tax as income.
C) Contributions are taxable at the fair market value of the assets contributed.
D) The partnership must pay tax on the contributed assets.
Which of the following would NOT be considered a pass-through entity?
A) S-Corporation
B) LLC taxed as a partnership
C) Sole proprietorship
D) C-Corporation
What is the basis of a partner in a partnership after receiving a distribution of property?
A) The basis remains unchanged, regardless of the value of the property.
B) The basis is reduced by the fair market value of the property received.
C) The basis is increased by the fair market value of the property received.
D) The basis is increased by the amount of the partner’s share of liabilities.
How is a partner’s share of the partnership’s income typically taxed?
A) As corporate income tax.
B) As ordinary income, subject to self-employment tax if the partner is materially participating.
C) As dividend income, subject to dividend tax rates.
D) As capital gains income.
When a partner in a partnership receives a distribution that exceeds their basis in the partnership, what is the tax consequence?
A) The distribution is treated as a capital gain.
B) The distribution is treated as ordinary income.
C) The distribution is treated as a return of capital.
D) The distribution is tax-free up to the amount of the basis.
What tax form does an LLC taxed as a partnership use to report its income, deductions, and distributions to its members?
A) Form 1065
B) Form 1120
C) Form 1040
D) Form 990
In a partnership, what happens to a partner’s basis when they receive a distribution of cash?
A) The basis is increased by the amount of the distribution.
B) The basis is decreased by the amount of the distribution, up to the partner’s basis in the partnership.
C) The basis remains unchanged.
D) The distribution is treated as taxable income, increasing the partner’s basis.
How does an S-Corporation handle excess accumulated earnings?
A) They are taxed at the individual level.
B) They are taxed at the corporate level if they exceed reasonable business needs.
C) They are subject to self-employment tax.
D) They are not taxed, regardless of the amount.
What is a key benefit of using an LLC for tax purposes compared to other business structures?
A) LLCs are always exempt from self-employment tax.
B) LLCs allow for flexible taxation options, including the ability to be taxed as a sole proprietorship, partnership, S-Corporation, or C-Corporation.
C) LLCs automatically receive the lowest tax rates.
D) LLCs are exempt from income taxes on profits.
When is a limited partner generally subject to self-employment tax?
A) When they actively participate in the management of the business.
B) When they receive guaranteed payments from the partnership.
C) When they receive distributions from the partnership.
D) Limited partners are never subject to self-employment tax.
How is the income from an S-Corporation treated when it is passed through to shareholders?
A) It is taxed at the corporate tax rate.
B) It is taxed at the individual tax rate on the shareholder’s personal tax return.
C) It is not taxed if the shareholder’s basis in the stock is less than the income.
D) It is taxed only if it is distributed to the shareholder.
What happens if a partnership incurs a loss and a partner’s basis is not sufficient to absorb the loss?
A) The partner cannot claim the loss, and it is carried forward to future years.
B) The loss is passed through to other partners with sufficient basis.
C) The loss is permanently lost.
D) The partnership is required to pay taxes on the loss.
In a partnership, which of the following best describes how losses are allocated among partners?
A) Losses are allocated according to the partners’ ownership percentages unless the partnership agreement specifies otherwise.
B) Losses are allocated equally to all partners.
C) Losses are allocated only to the partner who contributed the most capital.
D) Losses are allocated only to the general partners.
What is the tax consequence of a partner selling their interest in a partnership?
A) The gain or loss is recognized based on the difference between the selling price and the partner’s basis in the partnership.
B) The gain or loss is not recognized for tax purposes until the partnership is liquidated.
C) The sale is treated as a tax-free event.
D) The partner is subject to self-employment tax on the sale.
Which of the following is true about the treatment of an LLC that elects to be taxed as an S-Corporation?
A) The LLC is taxed as a C-Corporation at the corporate level.
B) The LLC is treated as a pass-through entity, and income is passed through to the members.
C) The LLC must pay taxes on its income, and shareholders pay taxes on their share of income.
D) The LLC is taxed similarly to a sole proprietorship.
What is the effect of a partner’s share of liabilities on their basis in the partnership?
A) It has no effect on the partner’s basis.
B) It increases the partner’s basis.
C) It decreases the partner’s basis.
D) It reduces the partner’s taxable income.
How are distributions from an S-Corporation treated for tax purposes if the shareholder has a negative basis in their stock?
A) The distribution is taxed as ordinary income.
B) The distribution is taxed as a capital gain.
C) The distribution is treated as a loan and not taxable.
D) The distribution is taxable to the extent of the shareholder’s negative basis.
Which of the following is required for an LLC to elect to be taxed as an S-Corporation?
A) The LLC must have at least 100 members.
B) All members of the LLC must be U.S. citizens.
C) The LLC must have more than one member.
D) The LLC must file an election on Form 1120S.
What is the tax treatment of capital gains on assets held by a partnership?
A) Capital gains are passed through to the partners and taxed at their individual capital gains rates.
B) Capital gains are taxed at the partnership level before being distributed.
C) Capital gains are not taxed until the partnership is liquidated.
D) Capital gains are taxed as ordinary income at the individual level.
What is the primary advantage of a partnership over a C-Corporation in terms of tax treatment?
A) Partnerships are not subject to double taxation on income.
B) Partnerships can raise capital by issuing stocks.
C) Partnerships have no income tax obligations.
D) Partnerships do not have to follow any specific formalities.
Which of the following is true regarding the taxation of S-Corporation income?
A) S-Corporation income is taxed at the individual level only if distributed to shareholders.
B) S-Corporation income is subject to corporate income tax, and then dividends are taxed at the individual level.
C) S-Corporation income is passed through to shareholders and taxed on their individual returns regardless of distribution.
D) S-Corporation income is never subject to tax if retained in the corporation.
Which of the following accurately reflects the taxation of an LLC that has elected to be taxed as a partnership?
A) The LLC itself is taxed on its income at the corporate tax rate.
B) The LLC is taxed as a sole proprietorship, and members are taxed on their share of income.
C) The LLC passes its income and deductions through to its members, who report the income on their individual tax returns.
D) The LLC pays tax at both the corporate and individual levels.
What happens when a partner contributes property to a partnership in exchange for an interest in the partnership?
A) The partnership recognizes gain on the contribution.
B) The partner recognizes gain on the contribution.
C) The partnership does not recognize gain on the contribution.
D) The partner must pay tax on the property’s fair market value.
Which of the following is a required characteristic for an entity to qualify as an S-Corporation?
A) The entity must have no more than 75 shareholders.
B) The entity must issue only one class of stock.
C) The entity must have shareholders who are not individuals or estates.
D) The entity must be a limited liability company (LLC).
If an S-Corporation has a passive investment income that exceeds 25% of its gross receipts, which of the following may occur?
A) The S-Corporation may be required to convert to a C-Corporation.
B) The S-Corporation will lose its S-Corporation status.
C) The S-Corporation will be subject to an additional 3.8% net investment income tax.
D) The S-Corporation will be exempt from tax.
In a partnership, how are liabilities typically allocated for tax purposes?
A) Liabilities are allocated to partners based on their capital contributions.
B) Liabilities are allocated according to the partnership’s income distribution.
C) Liabilities are allocated according to the partnership agreement, which may not correspond to ownership percentages.
D) Liabilities are split equally between all partners.
What happens when an S-Corporation distributes appreciated property to its shareholders?
A) The distribution is tax-free for the corporation and the shareholder.
B) The distribution triggers a taxable gain for the corporation on the appreciation.
C) The distribution is subject to self-employment tax.
D) The distribution is treated as a dividend for the shareholders.
How is a partner’s share of income allocated in a partnership with a different profit and loss allocation agreement than the ownership percentages?
A) The allocation of income must always be equal to the ownership percentages.
B) The allocation of income is determined by the partnership agreement, even if it differs from ownership percentages.
C) The income is allocated according to each partner’s capital account balance.
D) Income is automatically allocated equally among all partners, regardless of the agreement.
What is the tax implication of an LLC electing to be taxed as an S-Corporation rather than as a partnership?
A) The LLC will be taxed at both the entity level and the individual level.
B) The LLC’s income will pass through to its owners, and self-employment tax may be avoided.
C) The LLC will pay a flat tax on its income.
D) The LLC will be subject to corporate tax on all income.
When can a partner deduct losses from a partnership on their personal tax return?
A) When the partnership generates income.
B) When the partner has sufficient basis in the partnership to absorb the loss.
C) When the partner has paid the partnership’s liabilities.
D) Losses are never deductible by the partner.
How is income from an S-Corporation typically taxed for a shareholder who is actively involved in the business?
A) As ordinary income, subject to self-employment tax.
B) As dividend income, subject to the qualified dividend tax rate.
C) As long-term capital gains income.
D) As ordinary income, not subject to self-employment tax.
If a partnership distributes appreciated property to a partner, how is the gain treated for tax purposes?
A) The gain is recognized by the partner but not the partnership.
B) The gain is recognized by the partnership, and the partner receives the property at its fair market value.
C) The partnership does not recognize any gain on the distribution, but the partner must recognize gain.
D) The gain is not recognized by either the partnership or the partner.
Which of the following is true regarding self-employment tax for S-Corporation shareholders?
A) All S-Corporation shareholders are subject to self-employment tax on their share of business income.
B) S-Corporation shareholders who are also employees are subject to self-employment tax only on their salary, not on their share of business income.
C) S-Corporation shareholders are never subject to self-employment tax.
D) S-Corporation shareholders are subject to self-employment tax on all distributions.
When does a partner in a partnership recognize income or gain from the sale of their partnership interest?
A) When the partnership distributes the sale proceeds to the partner.
B) When the partnership dissolves.
C) When the partner sells their interest to another party, recognizing gain or loss based on the sale price and their basis in the partnership.
D) The partner recognizes income only when the partnership generates income.
How are guaranteed payments to partners in a partnership treated for tax purposes?
A) They are considered a distribution of profit and are tax-free.
B) They are treated as ordinary income and subject to self-employment tax.
C) They are treated as capital gains.
D) They are subject to corporate tax rates.
How are contributions of services in exchange for a partnership interest treated for tax purposes?
A) The contribution of services is not taxable.
B) The contribution of services is treated as ordinary income to the partner providing the services.
C) The services are treated as a capital gain.
D) The contribution of services is treated as a tax-free exchange.
If a partner in a partnership guarantees a loan for the business, how does this affect their basis in the partnership?
A) The partner’s basis is increased by the amount of the loan guaranteed.
B) The partner’s basis is decreased by the amount of the loan guaranteed.
C) The partner’s basis is not affected by the guarantee of the loan.
D) The partner’s basis is only increased if the loan is actually drawn upon by the partnership.
How does a partner’s share of partnership liabilities affect their ability to deduct losses?
A) The share of liabilities increases the partner’s basis, allowing them to deduct more losses.
B) The share of liabilities decreases the partner’s basis, limiting the amount of losses they can deduct.
C) The share of liabilities has no effect on a partner’s ability to deduct losses.
D) The share of liabilities only affects the partner’s capital gains tax.
Which of the following is true about LLCs taxed as S-Corporations in relation to self-employment tax?
A) LLCs taxed as S-Corporations can avoid self-employment tax on their pass-through income if the members are not actively involved in the business.
B) Self-employment tax is automatically imposed on all distributions from an LLC taxed as an S-Corporation.
C) Members of an LLC taxed as an S-Corporation are subject to self-employment tax on all income, regardless of their level of participation.
D) LLCs taxed as S-Corporations are exempt from self-employment tax on salaries paid to their members.
How is a partner’s capital account affected by a partnership’s income and losses?
A) The capital account is unaffected by income or losses.
B) The capital account increases with the partner’s share of income and decreases with their share of losses.
C) The capital account only changes when the partner contributes additional capital.
D) The capital account is adjusted only when the partner withdraws money from the partnership.
How is a distribution from an S-Corporation treated if it exceeds the shareholder’s basis in the stock?
A) The distribution is taxable as ordinary income.
B) The distribution is taxable as capital gain.
C) The distribution is not taxable if it is reinvested in the corporation.
D) The distribution is tax-free up to the basis amount, with the excess treated as a dividend.
Which of the following is true about a partner’s basis in a partnership when the partnership takes on new debt?
A) A partner’s basis is not affected by new debt.
B) A partner’s basis is decreased by their share of the new debt.
C) A partner’s basis is increased by their share of the new debt.
D) A partner’s basis is automatically adjusted to the fair market value of the new debt.
Which of the following items is generally not subject to self-employment tax for a partner in a partnership?
A) Guaranteed payments to the partner.
B) The partner’s share of the partnership’s ordinary business income.
C) The partner’s share of capital gains.
D) Any compensation paid to the partner for services rendered.
What tax form is used to report the income, deductions, and distributions for a partnership?
A) Form 1120
B) Form 1065
C) Form 1040
D) Form 1120S
How is an LLC taxed if it does not elect to be taxed as a corporation or an S-Corporation?
A) It is taxed as a sole proprietorship if it has one member.
B) It is taxed as a corporation, regardless of the number of members.
C) It is taxed as a partnership if it has multiple members.
D) It is taxed as a partnership, regardless of the number of members.
How is an S-Corporation’s income typically treated when passed through to shareholders who are actively involved in the business?
A) The income is subject to ordinary income tax but not self-employment tax.
B) The income is subject to self-employment tax in addition to ordinary income tax.
C) The income is taxed at the corporate tax rate.
D) The income is tax-free for the shareholders.
When a partner in a partnership receives a distribution of property, which of the following is true?
A) The partner must recognize gain if the distribution exceeds their basis in the partnership.
B) The partner must recognize gain on all property distributions.
C) The distribution is tax-free if it is in the form of cash only.
D) The partnership must recognize gain on all distributions of property.
What is the tax treatment of a partner’s share of a partnership’s liabilities when the partnership is liquidated?
A) The partner recognizes capital gain on the liabilities.
B) The partner’s share of liabilities is treated as a distribution to the partner.
C) The partner’s share of liabilities increases their taxable income.
D) The partner’s share of liabilities is disregarded for tax purposes.
When an LLC elects to be taxed as an S-Corporation, how is the income passed through to the members?
A) The income is passed through and taxed at the LLC level.
B) The income is passed through to members and taxed at their individual tax rates.
C) The income is taxed at the corporate level before passing through to members.
D) The income is exempt from tax for the members.
How are distributions from a partnership to a partner generally taxed?
A) Distributions are taxed as ordinary income regardless of the source.
B) Distributions are not taxed if the partner’s basis in the partnership exceeds the amount of the distribution.
C) Distributions are always taxed as capital gains.
D) Distributions are tax-free until the partner sells their interest in the partnership.
What is the tax consequence for a partner who receives a distribution in excess of their basis in a partnership?
A) The distribution is treated as ordinary income.
B) The distribution is treated as a capital gain.
C) The distribution is tax-free up to the amount of the partner’s basis.
D) The distribution is treated as a tax-free return of capital.
How are profits and losses generally allocated in a partnership for tax purposes?
A) Based on the capital contributions of each partner.
B) Based on the partnership agreement, which may differ from the ownership percentages.
C) Allocated equally to all partners, regardless of the agreement.
D) Based on the management decisions made by the partners.
If an S-Corporation has accumulated earnings that are not distributed, how are they taxed?
A) They are subject to double taxation—first at the corporate level, then at the individual level when distributed.
B) They are not subject to any tax unless they exceed a certain threshold.
C) They are taxed at the corporate level but not the individual level.
D) They are taxed on the individual returns of the shareholders.
How does a partner’s capital account change if the partnership incurs a loss?
A) The capital account is increased by the loss.
B) The capital account is decreased by the loss.
C) The capital account remains unchanged regardless of the loss.
D) The capital account is increased by the loss only if the partner is a general partner.
What is the effect of a partnership’s liquidation on the capital accounts of the partners?
A) Capital accounts are adjusted based on the partnership’s profits.
B) Capital accounts are adjusted based on the distributions made during liquidation.
C) Capital accounts are not adjusted during liquidation.
D) Capital accounts are only adjusted for the final distribution.
What is the tax treatment of a distribution to an S-Corporation shareholder who has a zero or negative basis in their stock?
A) The distribution is treated as ordinary income.
B) The distribution is treated as capital gain income.
C) The distribution is not taxable until the shareholder sells their stock.
D) The distribution is treated as a return of capital.
What happens when an LLC distributes appreciated property to one of its members?
A) The LLC recognizes gain on the distribution.
B) The distribution is tax-free to the member, and the LLC recognizes no gain.
C) The member recognizes gain equal to the difference between the fair market value and the property’s basis.
D) The member does not recognize gain until the property is sold.
In a partnership, if a partner’s basis is insufficient to absorb the loss, how is the loss treated?
A) The loss is deferred and carried forward until the partner’s basis is sufficient.
B) The loss is deductible in the current year but only for the amount of basis the partner has.
C) The loss is allocated to other partners who have sufficient basis.
D) The loss is not deductible under any circumstances.
What is the basis for a limited partner in a partnership for the purpose of deducting partnership losses?
A) The limited partner’s share of partnership liabilities is not included in their basis.
B) The limited partner’s basis is calculated by the total capital contribution and share of liabilities.
C) A limited partner’s basis is calculated by their share of liabilities and their share of profits.
D) A limited partner’s basis is the same as their capital contribution, regardless of liabilities.
When a partnership sells property that has appreciated in value, what is the tax consequence?
A) The partnership must recognize the gain, and it is passed through to the partners.
B) The gain is only recognized when the property is distributed to the partners.
C) The gain is never recognized if the property is held for more than one year.
D) The gain is subject to corporate tax rates before it is passed through to the partners.
How does an LLC taxed as an S-Corporation handle salary payments to its members?
A) Salary payments are not deductible by the LLC but are included in the member’s taxable income.
B) Salary payments are deductible by the LLC and are subject to employment taxes.
C) Salary payments are taxed as distributions and not subject to employment taxes.
D) Salary payments are taxed as dividends to the member.
What happens to the self-employment tax liability when a partnership distributes property to a partner in exchange for their interest in the partnership?
A) The partner is subject to self-employment tax on the fair market value of the property received.
B) The partner is not subject to self-employment tax, as the distribution is not considered income.
C) The partnership is liable for the self-employment tax on the distributed property.
D) The self-employment tax is deferred until the property is sold by the partner.
How is an LLC treated for tax purposes if it has no employees and only one member?
A) It is treated as a partnership.
B) It is treated as a sole proprietorship.
C) It is treated as a corporation by default.
D) It is treated as a tax-exempt organization.
What must an LLC do to avoid double taxation if it is taxed as a corporation?
A) Elect to be taxed as an S-Corporation.
B) File an extension to avoid tax filings.
C) File Form 1065 and report income from each member.
D) Elect to be taxed as a partnership.
Which of the following is a key feature of an S-Corporation that differentiates it from a C-Corporation?
A) An S-Corporation’s income is subject to double taxation.
B) S-Corporation shareholders can deduct business losses directly on their tax returns.
C) S-Corporations are exempt from tax entirely.
D) S-Corporation shareholders are taxed on dividends, not income.
When a partnership’s liabilities increase, what is the effect on the partners’ basis?
A) The partners’ basis is decreased to reflect the increase in liabilities.
B) The partners’ basis remains unchanged.
C) The partners’ basis increases in proportion to the increase in liabilities.
D) The partners’ basis increases by the total amount of new debt.
How are distributions from an S-Corporation to a shareholder treated for tax purposes?
A) Distributions are always taxable as ordinary income.
B) Distributions are not taxable if they do not exceed the shareholder’s basis in the stock.
C) Distributions are taxable as capital gains, regardless of the shareholder’s basis.
D) Distributions are tax-free unless the shareholder sells their stock.
If a partner in a partnership sells their interest to another partner, what is the tax consequence for the selling partner?
A) The selling partner recognizes gain or loss based on the difference between the sale price and their basis in the partnership.
B) The selling partner does not recognize any gain or loss until the partnership is liquidated.
C) The selling partner’s gain or loss is recognized only upon the partner’s death.
D) The sale price is irrelevant, and the selling partner does not recognize any gain or loss.
What is the effect on a partner’s basis if the partnership borrows money and the partner personally guarantees the loan?
A) The partner’s basis is increased by their share of the loan, even if the loan is not yet drawn.
B) The partner’s basis is not affected by guaranteeing the loan.
C) The partner’s basis is decreased by their share of the loan.
D) The partner’s basis is increased only when the loan is repaid.
What is the purpose of Form K-1 in a partnership?
A) To report the partnership’s total income and deductions.
B) To report a partner’s share of income, deductions, credits, and other items from the partnership.
C) To report the partnership’s capital gains and losses to the IRS.
D) To report distributions made by the partnership to each partner.
Which of the following is a characteristic of a disregarded entity for tax purposes?
A) It is treated as a separate tax-paying entity.
B) Its income is reported on the tax return of the owner.
C) It is subject to corporate taxation.
D) It can elect to be taxed as an S-Corporation.
How is a partner’s share of income taxed if the partnership has a nonrecourse loan?
A) The partner’s share of income is not affected by the nonrecourse loan.
B) The partner’s share of income is reduced by the nonrecourse loan.
C) The partner’s share of income is increased by the nonrecourse loan.
D) The partner must pay additional self-employment taxes due to the nonrecourse loan.
How is income from a partnership taxed if a partner provides services to the partnership?
A) The income is taxed as self-employment income.
B) The income is taxed as rental income.
C) The income is not taxable until it is distributed.
D) The income is taxed at the corporate tax rate.
What is the tax treatment of a guaranteed payment received by a partner in a partnership?
A) It is considered a dividend and taxed as capital gains.
B) It is considered ordinary income and subject to self-employment tax.
C) It is considered tax-free compensation for services.
D) It is considered interest income and taxed at the corporate tax rate.
What is the maximum number of shareholders an S-Corporation can have under IRS rules?
A) 50
B) 100
C) 150
D) 200
How is a member’s basis in an LLC taxed as a partnership affected when the LLC assumes additional liabilities?
A) The member’s basis is decreased by their share of the liabilities.
B) The member’s basis is not affected by the assumption of new liabilities.
C) The member’s basis is increased by their share of the liabilities.
D) The member’s basis is adjusted based on the percentage of ownership in the LLC.
How is the termination of an S-Corporation’s status typically handled for tax purposes?
A) The S-Corporation is automatically converted to a C-Corporation, and its assets are revalued.
B) The S-Corporation continues to be taxed as an S-Corporation, regardless of changes in shareholder composition.
C) The S-Corporation may be subject to tax on its accumulated earnings, and its shareholders must report the income on their personal tax returns.
D) The S-Corporation’s status is terminated without any tax implications.
What is a key difference between an LLC and an S-Corporation for tax purposes?
A) LLCs are always subject to double taxation.
B) LLCs provide more flexibility in allocating profits and losses compared to S-Corporations.
C) LLCs are not allowed to pass through income to members.
D) LLCs are not required to file any tax forms with the IRS.
Which of the following is a requirement for a partnership to qualify for the like-kind exchange treatment under Section 1031?
A) The partnership must distribute all property to the partners.
B) The property exchanged must be business or investment property.
C) The partnership must engage in the sale of securities.
D) The property must be personal-use property.
How are guaranteed payments treated for tax purposes in a partnership?
A) They are treated as a capital gain to the recipient partner.
B) They are treated as ordinary income to the recipient partner and deductible by the partnership.
C) They are treated as tax-free distributions to the recipient partner.
D) They are treated as dividends to the recipient partner and taxed at a lower rate.
What is the treatment of an LLC that elects to be taxed as an S-Corporation for purposes of self-employment tax?
A) The LLC’s income is subject to self-employment tax regardless of the distribution to members.
B) Only wages paid to members who are also employees are subject to self-employment tax.
C) All income from the LLC is exempt from self-employment tax.
D) The LLC is treated as a C-Corporation for self-employment tax purposes.
When an S-Corporation has a shareholder loan to the corporation, how is the loan treated for tax purposes?
A) The loan is treated as taxable income to the shareholder.
B) The loan is considered part of the shareholder’s basis in the S-Corporation.
C) The loan is treated as a capital gain for the shareholder.
D) The loan is treated as an unrelated loan and has no tax impact.
If a partner contributes property to a partnership and the property has a built-in gain, how is the gain treated when the partnership later sells the property?
A) The gain is taxed to the partner who contributed the property.
B) The partnership recognizes the gain on the sale of the property.
C) The gain is not recognized until the property is distributed to the partner.
D) The gain is shared equally among all partners.
When an S-Corporation is liquidated, how is the distribution of its assets treated for tax purposes?
A) The distribution is treated as ordinary income to the shareholder.
B) The distribution is treated as a return of capital to the shareholder.
C) The distribution is treated as capital gain to the shareholder to the extent of any appreciated assets.
D) The distribution is not taxed unless it exceeds the shareholder’s basis in the stock.
What is the tax treatment when an S-Corporation shareholder loans money to the S-Corporation?
A) The loan is treated as taxable income to the shareholder.
B) The loan increases the shareholder’s basis in the S-Corporation and is not taxable.
C) The loan is treated as a capital contribution to the S-Corporation.
D) The loan is considered a dividend and subject to tax.
What is the default tax treatment for an LLC that has more than one member?
A) It is treated as a sole proprietorship for tax purposes.
B) It is treated as a C-Corporation for tax purposes.
C) It is treated as a partnership for tax purposes.
D) It is treated as a disregarded entity for tax purposes.
When a partnership distributes property to a partner, how is the partner’s basis in the property determined?
A) The partner’s basis is equal to the fair market value of the property.
B) The partner’s basis is equal to the partnership’s basis in the property.
C) The partner’s basis is zero unless the partnership recognizes a gain.
D) The partner’s basis is determined by the amount of the partnership’s liabilities.
How is a partner’s distributive share of a partnership’s liabilities determined for tax purposes?
A) It is based on the amount of capital the partner has invested in the partnership.
B) It is based on the partnership agreement and can differ from the ownership percentage.
C) It is based on the number of partners in the partnership.
D) It is determined by the total amount of the partnership’s debt.
Which of the following accurately describes the tax treatment of a partnership’s distributive share of income?
A) The income is taxed at the partnership level, and partners pay tax on distributions.
B) The income is taxed at the partner level, regardless of distributions.
C) The income is taxed at the partner level only if the partner has a positive capital account.
D) The income is taxed at the corporate level and then passed to the partners.
How is the income from a pass-through entity generally taxed?
A) It is taxed at the entity level.
B) It is taxed at the individual tax rate of the owners.
C) It is taxed at a flat rate.
D) It is taxed at the corporate tax rate.
What is the key tax benefit of using a pass-through entity like an S-Corporation or LLC?
A) The entity itself is exempt from taxation.
B) Income is taxed only once at the owner level, avoiding double taxation.
C) The entity can avoid paying self-employment tax on all income.
D) The entity is eligible for a corporate tax deduction.
How is a partner’s basis adjusted if the partnership makes a distribution of money to the partner?
A) The basis is increased by the amount of the distribution.
B) The basis is decreased by the amount of the distribution.
C) The basis is unchanged unless the distribution exceeds the partner’s basis.
D) The basis is decreased only if the distribution is in-kind property.
What is the impact of an S-Corporation’s accumulated earnings and profits (E&P) on its shareholders?
A) The E&P of the S-Corporation is irrelevant for the shareholders’ tax purposes.
B) Distributions from an S-Corporation’s E&P are taxed as ordinary income to shareholders.
C) Distributions from the E&P are taxed as long-term capital gains.
D) Distributions from E&P are tax-free to the shareholders.
If a partner sells their interest in a partnership, how is the sale of the interest generally taxed?
A) The sale is taxed as ordinary income, except for any gain attributable to the sale of property that was held for investment.
B) The sale is taxed as capital gains, regardless of the underlying partnership assets.
C) The sale is not subject to tax until the partnership is liquidated.
D) The sale is treated as a gift for tax purposes.
How is a partnership interest treated for tax purposes when a partner dies?
A) The partnership interest is transferred tax-free to the partner’s heirs.
B) The partnership interest is taxed at fair market value at the time of the partner’s death.
C) The partnership must pay estate tax on the partner’s interest.
D) The partnership interest is not taxable and is automatically transferred to the surviving partner.
When can an S-Corporation terminate its S status?
A) Only at the end of the tax year.
B) It can terminate at any time during the year by notifying the IRS.
C) It can terminate only if the shareholders approve the termination.
D) It automatically terminates if it has more than 100 shareholders.
In the case of a partner who guarantees a partnership debt, how is the partner’s basis affected?
A) The partner’s basis is not affected by the guarantee.
B) The partner’s basis is increased by the full amount of the guaranteed debt.
C) The partner’s basis is decreased by the full amount of the guaranteed debt.
D) The partner’s basis is increased only when the debt is repaid.
If a partnership distributes property to a partner, how is the partner’s basis in the property determined for tax purposes?
A) The partner’s basis in the property is equal to the partnership’s basis in the property at the time of distribution.
B) The partner’s basis in the property is its fair market value at the time of the distribution.
C) The partner’s basis in the property is reduced by the amount of any liabilities assumed.
D) The partner’s basis in the property is its adjusted basis in the partnership interest.
Which of the following is true regarding LLCs that elect to be treated as S-Corporations for tax purposes?
A) The LLC is treated as a partnership for all tax purposes.
B) The LLC’s members are subject to self-employment tax on the LLC’s income.
C) The LLC must file a corporate tax return instead of a partnership return.
D) The LLC is taxed as a C-Corporation for all purposes.
Which of the following taxes are typically imposed on an S-Corporation’s income?
A) Income tax at the corporate level and the shareholder level.
B) Self-employment tax only.
C) Income tax at the shareholder level, but not at the corporate level.
D) No taxes are imposed on an S-Corporation’s income.
What is the result of a partner in a partnership contributing appreciated property to the partnership?
A) The partnership’s basis in the property is equal to the fair market value at the time of contribution.
B) The contributing partner recognizes gain on the appreciated property at the time of contribution.
C) The partnership takes a carryover basis in the property.
D) The partner’s basis in the partnership interest is unaffected by the property contribution.
In a like-kind exchange of property held by a partnership, what is the effect on the partners’ individual basis in the property?
A) The partners’ basis in the property is unaffected by the exchange.
B) The partners’ basis is calculated based on the fair market value of the replacement property.
C) The partners’ basis is adjusted to reflect the partnership’s basis in the property after the exchange.
D) The partners’ basis in the replacement property is the same as their original property basis.
How does the tax treatment of an S-Corporation’s losses differ from a partnership’s losses for individual shareholders or partners?
A) S-Corporation losses are deductible only if the shareholder has sufficient basis, while partnership losses are deductible based on the partner’s share of liabilities.
B) S-Corporation losses are always fully deductible by shareholders.
C) Partnership losses are never deductible, whereas S-Corporation losses are deductible.
D) S-Corporation losses are not deductible by shareholders at all.
What happens when a partner receives a distribution of property with a liability attached to it?
A) The distribution is taxable as income, and the partner is not liable for the attached liability.
B) The liability increases the partner’s basis in the partnership.
C) The partner assumes the liability and reduces their basis by the amount of the liability.
D) The partner’s basis in the property is increased by the amount of the liability.
What happens to the basis of a partner’s interest in a partnership when the partnership distributes cash to the partner?
A) The basis of the partner’s interest increases by the amount of the cash distribution.
B) The basis of the partner’s interest is reduced by the amount of the cash distribution.
C) The basis of the partner’s interest is unaffected by the cash distribution.
D) The partner’s basis is decreased only if the distribution is considered a liquidating distribution.
How is a partner’s distributive share of partnership income or loss generally allocated?
A) The allocation is based on the partner’s ownership percentage unless otherwise agreed in the partnership agreement.
B) The allocation is always equal among all partners, regardless of the partnership agreement.
C) The allocation is based on the amount of capital the partner has invested in the partnership.
D) The allocation is based on the partner’s individual tax bracket.
When is a pass-through entity required to file Form 1065 (U.S. Return of Partnership Income)?
A) Only when the partnership has employees.
B) Only if the partnership generates more than $100,000 in revenue.
C) Always, regardless of the amount of income or activity.
D) Only if the partnership has multiple members.
Which of the following is a tax implication when an S-Corporation shareholder sells their stock?
A) The sale is taxable as ordinary income.
B) The sale is taxable as capital gains, and the gain is based on the difference between the sale price and the shareholder’s basis in the stock.
C) The sale is considered a nontaxable event under all circumstances.
D) The sale is taxable at the corporate level, not at the shareholder level.
How is an LLC that is taxed as a partnership treated for self-employment tax purposes?
A) All income from the LLC is subject to self-employment tax.
B) Only income derived from passive activities is exempt from self-employment tax.
C) Income allocated to LLC members as guaranteed payments is subject to self-employment tax.
D) LLC members do not pay self-employment tax unless they are also employees of the LLC.
How does the basis of a partner’s interest in a partnership change when the partnership borrows money?
A) The partner’s basis is unaffected by the partnership’s borrowing of money.
B) The partner’s basis is increased by their share of the partnership’s debt.
C) The partner’s basis is decreased by their share of the partnership’s debt.
D) The partner’s basis is automatically adjusted to match the loan amount.
When is a partner’s basis in a partnership interest increased?
A) When the partnership distributes cash to the partner.
B) When the partner contributes additional capital to the partnership.
C) When the partnership recognizes losses on its operations.
D) When the partner receives a distribution of property.
What happens when a partner sells property to a partnership?
A) The sale is treated as a taxable event, and the partner recognizes gain or loss on the sale.
B) The partner is not required to recognize gain or loss unless the property is later sold outside the partnership.
C) The sale is automatically treated as a tax-free exchange.
D) The sale is treated as a capital contribution to the partnership.
What is the tax effect on an S-Corporation shareholder when the corporation sells a property with a built-in gain?
A) The shareholder is responsible for paying taxes on the built-in gain.
B) The built-in gain is taxed at the corporate level.
C) The built-in gain is not taxed until the shareholder sells their shares.
D) The built-in gain is not taxable to the corporation or shareholders.
How is the gain or loss from the sale of a partnership interest treated for tax purposes?
A) The gain or loss is always treated as ordinary income.
B) The gain or loss is treated as a capital gain or loss, subject to potential recharacterization based on the partnership’s assets.
C) The gain or loss is treated as dividend income.
D) The gain or loss is treated as income from the sale of inventory.
What is the key difference between a limited partnership (LP) and a general partnership (GP)?
A) LPs are taxed as corporations, while GPs are not.
B) LPs require at least one general partner and one limited partner, whereas GPs have only general partners.
C) LPs cannot distribute profits, whereas GPs can.
D) LPs do not have to file tax returns, while GPs do.
What is a guaranteed payment in a partnership, and how is it taxed?
A) A guaranteed payment is a distribution to a partner that is taxed as a capital gain.
B) A guaranteed payment is a payment to a partner for services or capital, and it is subject to self-employment tax.
C) A guaranteed payment is treated as a return on the partner’s capital contribution and is tax-free.
D) A guaranteed payment is a tax-free distribution of profits to the partner.
What is the tax treatment of a distribution of appreciated property from an S-Corporation to a shareholder?
A) The distribution is taxed as capital gain.
B) The distribution is tax-free to the shareholder.
C) The distribution is treated as ordinary income to the shareholder.
D) The distribution is taxable at the corporate level.
If a partnership’s liabilities increase, how is this typically treated for tax purposes?
A) The increase in liabilities decreases the partners’ basis.
B) The increase in liabilities increases the partners’ basis.
C) The increase in liabilities does not affect the partners’ basis.
D) The increase in liabilities triggers immediate taxation on the partners.
Which of the following is true regarding S-Corporation shareholders who are also employees of the corporation?
A) They are not subject to self-employment tax on their wages.
B) They must pay self-employment tax on their share of the S-Corporation’s income, regardless of whether it is distributed.
C) They are exempt from paying self-employment tax on both salary and distribution income.
D) They must pay self-employment tax only on their distribution income.
In a partnership, how are losses allocated to partners if there is no agreement otherwise?
A) Losses are allocated according to the partners’ ownership percentages.
B) Losses are allocated based on the amount of capital each partner has contributed.
C) Losses are allocated equally among the partners.
D) Losses are allocated to the partner with the highest income.
How does a change in the ownership structure of an S-Corporation affect its tax status?
A) The S-Corporation will lose its status if it has more than 100 shareholders.
B) The S-Corporation will lose its status if any shareholder is not a U.S. citizen or resident.
C) The S-Corporation will retain its status if its ownership structure changes, as long as it maintains eligibility.
D) The S-Corporation automatically converts to a C-Corporation when there is a change in ownership.
What is the tax consequence when an S-Corporation makes a distribution to its shareholders that exceeds the shareholder’s basis in their stock?
A) The distribution is taxable as ordinary income.
B) The distribution is taxable as capital gain.
C) The distribution is non-taxable.
D) The distribution is deductible to the S-Corporation.
What happens when a partner contributes property to a partnership that is subject to a liability?
A) The partner recognizes gain if the liability exceeds the property’s basis.
B) The partner’s basis in the property is reduced by the liability.
C) The partner’s basis in the property is unaffected by the liability.
D) The partnership assumes the liability and is required to pay it.
How are distributions from an LLC taxed if the LLC is treated as a partnership for tax purposes?
A) Distributions are taxed as ordinary income to the members.
B) Distributions are taxed based on the member’s share of the LLC’s profits and liabilities.
C) Distributions are tax-free as long as the LLC is in business.
D) Distributions are subject to both income and self-employment taxes.
In a partnership, how are liabilities treated for tax purposes when a partner assumes more than their share of partnership liabilities?
A) The partner’s basis is decreased by the liabilities assumed.
B) The partner’s basis is unaffected by assuming additional liabilities.
C) The partner’s basis is increased by the liabilities assumed.
D) The partner recognizes gain from assuming additional liabilities.
What tax benefit is available to a partner who holds a partnership interest for more than one year before selling it?
A) The partner qualifies for long-term capital gains treatment on any gain from the sale.
B) The partner is taxed at ordinary income rates on the gain from the sale.
C) The partner can exclude any gain from the sale if the property sold is a capital asset.
D) The partner’s gain is subject to self-employment tax regardless of the holding period.
How are guaranteed payments to a partner in a partnership treated for tax purposes?
A) They are treated as wages and subject to employment taxes.
B) They are treated as capital gains and not subject to self-employment tax.
C) They are taxed as ordinary income and subject to self-employment tax.
D) They are not subject to tax until the partnership is liquidated.
What is the effect of an LLC electing to be treated as an S-Corporation for tax purposes?
A) The LLC is taxed as a partnership with special provisions for S-Corporation shareholders.
B) The LLC loses its liability protection for members.
C) The LLC is taxed as a C-Corporation unless it has 100 or fewer shareholders.
D) The LLC is taxed as an S-Corporation, and its income is passed through to its members.
When is an S-Corporation required to file Form 1120S, U.S. Income Tax Return for an S Corporation?
A) Only when the corporation has income or expenses.
B) Annually, by the 15th day of the third month following the close of the S-Corporation’s tax year.
C) When it has more than $1 million in revenue.
D) Only when the corporation is not actively conducting business.
How does a partner’s share of a partnership’s income affect their basis in the partnership?
A) The partner’s basis is increased by their share of the partnership’s income.
B) The partner’s basis is unaffected by the partnership’s income.
C) The partner’s basis is decreased by their share of the partnership’s income.
D) The partner’s basis is decreased by their share of the partnership’s losses, but not income.
What is the effect of a liquidating distribution of a partnership interest on a partner’s basis?
A) The partner’s basis is adjusted to reflect the property’s fair market value.
B) The partner’s basis is decreased to zero, and any remaining gain is recognized.
C) The partner’s basis is unaffected by the liquidation.
D) The partner’s basis in the partnership interest is increased by any liabilities assumed in the liquidation.
When a partner sells their partnership interest, how is the gain treated for tax purposes?
A) The gain is always taxed as ordinary income.
B) The gain is taxed as capital gain unless the partnership holds inventory or unrealized receivables.
C) The gain is subject to self-employment tax.
D) The gain is tax-free under a like-kind exchange rule.
What tax treatment applies to a partner who contributes a depreciated asset to a partnership?
A) The partner recognizes a loss on the contribution and reduces their basis in the partnership interest.
B) The partnership automatically recognizes the loss when the property is sold.
C) The partner’s basis in the partnership interest is unaffected by the contribution of a depreciated asset.
D) The contribution is tax-free, and the partner’s basis is unchanged.
If a partner in a partnership provides services instead of capital, how is the partner’s share of income generally treated?
A) The partner’s share of income is treated as guaranteed payments and subject to self-employment tax.
B) The partner’s share of income is treated as a dividend and not subject to self-employment tax.
C) The partner’s share of income is treated as capital gains and subject to special rates.
D) The partner’s share of income is treated as ordinary income and exempt from self-employment tax.
Which of the following statements is true about income passed through from an S-Corporation to its shareholders?
A) It is subject to corporate income tax before passing through to shareholders.
B) It is passed through as capital gains unless the S-Corporation has C-Corporation earnings.
C) It is taxed at the individual level, based on the shareholders’ tax brackets.
D) It is not subject to income tax at all, unless it is distributed.
What is the consequence of a partnership making a distribution of cash to a partner in excess of their basis?
A) The distribution is taxable as ordinary income.
B) The distribution is tax-free and does not affect the partner’s basis.
C) The distribution is taxable as capital gain.
D) The distribution is a return of capital and is taxed at the partnership level.
In a liquidating distribution from a partnership, if the partner receives property with a fair market value greater than their basis, how is the excess value treated for tax purposes?
A) The excess value is treated as capital gain.
B) The excess value is treated as ordinary income.
C) The excess value is tax-free under all circumstances.
D) The excess value is allocated to the partnership and taxed at the entity level.
What happens when a limited liability company (LLC) makes a non-liquidating distribution to a member?
A) The distribution is subject to self-employment tax, regardless of whether it is in the form of cash or property.
B) The distribution is tax-free as long as it is a return of capital.
C) The distribution is taxable only if it exceeds the member’s basis in the LLC.
D) The distribution is subject to capital gains tax, but only if the LLC is taxed as a partnership.
What is the treatment of guaranteed payments made by a partnership to a partner for services?
A) The payments are treated as self-employment income to the partner and are subject to self-employment tax.
B) The payments are subject to income tax but exempt from self-employment tax.
C) The payments are treated as dividends and not subject to income tax.
D) The payments are treated as capital gains for the partner.
How is a partnership’s income generally reported for tax purposes?
A) The income is taxed at the partnership level, and each partner reports their share on their individual return.
B) The partnership is a tax-exempt entity and does not report income.
C) The income is passed through to the partners, and the partnership itself is not taxed.
D) The partnership is taxed as a C-Corporation on its income.
When a limited liability company (LLC) elects to be treated as a corporation, how does this impact its taxation?
A) The LLC is taxed as a corporation and its income is subject to double taxation.
B) The LLC continues to be taxed as a pass-through entity but can now issue stock.
C) The LLC is taxed as a partnership, and its members pay self-employment tax on the income.
D) The LLC’s income is taxed at the individual members’ rates but with no self-employment tax.
How is the distribution of property from a partnership to a partner typically treated for tax purposes?
A) It is taxed as a capital gain if the property’s fair market value exceeds its basis.
B) It is taxed as ordinary income regardless of the property’s value.
C) It is tax-free unless the property is sold or disposed of later.
D) It is subject to self-employment tax, regardless of the property’s value.
In an S-Corporation, what happens to the accumulated adjustments account (AAA) when a shareholder receives a distribution?
A) The AAA is increased by the shareholder’s share of income and decreased by the distribution amount.
B) The AAA is unaffected by distributions, only by contributions from shareholders.
C) The AAA is decreased by any shareholder contributions, but not by distributions.
D) The AAA is not relevant for S-Corporations; it applies only to C-Corporations.
Which of the following partners may be subject to self-employment tax in a partnership?
A) Limited partners receiving guaranteed payments.
B) General partners receiving guaranteed payments for services.
C) Limited partners receiving only distributions.
D) General partners receiving only income from the sale of capital assets.
What happens when an S-Corporation makes a distribution of property to a shareholder and the property’s value exceeds its adjusted basis?
A) The excess value is treated as ordinary income.
B) The excess value is treated as a capital gain.
C) The excess value is treated as a dividend.
D) The excess value is not taxable under any circumstances.
Which of the following events would terminate an S-Corporation’s status?
A) A shareholder elects to change from an S-Corporation to a C-Corporation.
B) The corporation exceeds the limit of 100 shareholders.
C) The S-Corporation files its tax return late.
D) The S-Corporation changes its accounting method.
How does a change in a partner’s share of partnership liabilities affect their basis in the partnership?
A) The partner’s basis is decreased by their share of the increase in partnership liabilities.
B) The partner’s basis is increased by their share of the increase in partnership liabilities.
C) The partner’s basis is unaffected by changes in partnership liabilities.
D) The partner’s basis is decreased by the decrease in partnership liabilities.
How are distributions from an LLC treated when the LLC is taxed as a partnership?
A) Distributions are always taxable at the time of receipt.
B) Distributions reduce the members’ basis in the LLC and are taxable only if they exceed the basis.
C) Distributions are not taxable to the members regardless of the LLC’s income.
D) Distributions are taxed at the corporate rate before being passed through to members.
When an S-Corporation has both a tax loss and tax-exempt income, how does this impact the shareholders?
A) The tax-exempt income reduces the shareholders’ taxable income.
B) The tax-exempt income increases the shareholders’ basis in the S-Corporation.
C) The tax-exempt income is subject to self-employment tax.
D) The tax-exempt income is excluded from the shareholder’s basis calculation.
How does a distribution of appreciated property from a partnership affect the partner’s basis in their partnership interest?
A) The basis in the partner’s interest is decreased by the fair market value of the distributed property.
B) The partner’s basis is increased by the fair market value of the distributed property.
C) The partner’s basis is unaffected by the distribution of appreciated property.
D) The partner’s basis is decreased by the original cost of the property, not its fair market value.
What is the tax treatment of a partner’s share of partnership losses?
A) The partner’s share of losses is always deductible, even if it exceeds the partner’s basis.
B) The partner’s share of losses is deductible to the extent of the partner’s basis in the partnership interest.
C) The partner’s share of losses is never deductible.
D) The partner’s share of losses is carried forward and may be used in future years.
How is a contribution of property subject to debt treated in a partnership?
A) The debt is ignored for purposes of calculating the partner’s basis in the partnership interest.
B) The debt is treated as a contribution of capital to the partnership.
C) The debt is treated as a transfer of the liability to the partnership and increases the partner’s basis.
D) The partner is required to recognize gain on the transfer of the property subject to debt.
In an S-Corporation, what is the effect of a shareholder’s sale of stock on their share of the corporation’s income?
A) The shareholder must include the entire income of the S-Corporation in their individual tax return.
B) The shareholder only includes income earned during the period they owned the stock.
C) The income from the sale of stock is subject to corporate tax rates.
D) The shareholder is not taxed on any income earned after the sale of the stock.
What is the main purpose of the accumulated adjustments account (AAA) in an S-Corporation?
A) To track the amount of corporate debt allocated to shareholders.
B) To determine the amount of income that is taxable to shareholders.
C) To ensure that distributions to shareholders are tax-free to the extent of their basis.
D) To account for income that is subject to self-employment tax.
How are liabilities treated when a partner withdraws from a partnership?
A) The withdrawing partner’s share of liabilities is distributed to them and decreases their basis.
B) The liabilities are transferred to the remaining partners, and the withdrawing partner’s basis is unaffected.
C) The liabilities are treated as income to the withdrawing partner.
D) The withdrawing partner is not entitled to any share of the partnership’s liabilities.
What is the consequence of a partnership making a distribution of property that is subject to liabilities?
A) The partner is deemed to have received a distribution of the property’s fair market value.
B) The distribution is not taxable, and the partnership assumes the liability.
C) The partner assumes the liability and reduces their basis accordingly.
D) The distribution is treated as a tax-free return of capital.
How are profits and losses allocated in a partnership without a formal agreement?
A) Profits and losses are allocated based on the partners’ ownership percentages.
B) Profits and losses are divided equally among all partners.
C) Profits and losses are allocated based on each partner’s capital contributions.
D) Profits and losses are allocated based on each partner’s role in the partnership.
What is the tax treatment of income generated by an S-Corporation that is allocated to a shareholder who is also an employee?
A) The income is subject to both income tax and payroll tax on the shareholder’s wages.
B) The income is only subject to income tax and not payroll tax on the wages.
C) The income is exempt from payroll tax but subject to income tax.
D) The income is subject to neither income tax nor payroll tax if the shareholder’s salary is reasonable.
What is the tax treatment of a partner who receives a non-liquidating distribution of property in a partnership?
A) The partner recognizes gain only to the extent the property’s fair market value exceeds their basis in the partnership.
B) The partner must recognize the entire gain, including any gain from the distribution of appreciated property.
C) The distribution is taxable, but the partner’s basis in the partnership interest is unaffected.
D) The distribution is not taxable, and the partner’s basis is adjusted by the fair market value of the property.
How is a self-employed individual’s share of income from a partnership taxed?
A) It is subject to income tax but not self-employment tax.
B) It is subject to both income tax and self-employment tax.
C) It is not subject to self-employment tax but may be subject to other taxes.
D) It is treated as capital gains and subject to lower tax rates.
When a partnership sells property that has been held for more than a year, how is the gain treated for tax purposes?
A) The gain is treated as ordinary income.
B) The gain is treated as long-term capital gain.
C) The gain is treated as short-term capital gain, regardless of the holding period.
D) The gain is allocated to the partners based on their share of income.
What is the treatment of a partnership’s liability in calculating a partner’s basis in the partnership?
A) A partner’s basis is decreased by their share of the partnership’s liabilities.
B) A partner’s basis is increased by their share of the partnership’s liabilities.
C) A partner’s basis is unaffected by the partnership’s liabilities.
D) A partner’s basis is determined by the total liabilities of the partnership.
How does a partner’s basis in the partnership change if they receive a distribution in excess of their basis?
A) The excess is treated as taxable income to the partner.
B) The excess is added to the partner’s basis in the partnership.
C) The partner’s basis is unaffected by the excess distribution.
D) The partner recognizes capital gain on the excess amount.
If a partner’s share of the partnership’s liabilities exceeds their capital contribution, how is the excess treated?
A) The partner must report the excess as taxable income.
B) The excess liability decreases the partner’s basis.
C) The excess liability is ignored and does not affect the partner’s tax return.
D) The excess liability increases the partner’s basis in the partnership.
In the case of a distribution of property by an S-Corporation to a shareholder, how is the shareholder’s basis in the property determined?
A) The basis is equal to the fair market value of the property at the time of distribution.
B) The basis is equal to the corporation’s basis in the property at the time of distribution.
C) The basis is equal to the shareholder’s original investment in the corporation.
D) The basis is equal to the adjusted basis of the property in the hands of the shareholder before the distribution.
When a partner’s share of a partnership’s liabilities increases, what happens to the partner’s basis in their partnership interest?
A) The partner’s basis is unaffected by changes in the partnership’s liabilities.
B) The partner’s basis decreases by the increase in liabilities.
C) The partner’s basis increases by the increase in liabilities.
D) The partner’s basis is adjusted based on the amount of income earned by the partnership.
Which of the following is a requirement for an entity to elect to be taxed as an S-Corporation?
A) The entity must have more than 100 shareholders.
B) The entity must have only one class of stock.
C) The entity must be a public corporation.
D) The entity must be formed as a partnership.
When does a partner have to recognize gain on the distribution of appreciated property from a partnership?
A) When the property is sold by the partnership after being distributed to the partner.
B) When the partner receives a distribution of property that is subject to a liability greater than the partner’s basis.
C) When the partner is forced to recognize income at the time of distribution.
D) When the partnership dissolves and distributes assets.
What is the effect of a partner contributing property subject to a liability to a partnership?
A) The partner is required to recognize gain on the transfer of the property.
B) The liability is ignored for the purposes of calculating the partner’s share of partnership liabilities.
C) The liability is treated as a contribution of capital and does not affect the partner’s basis.
D) The partner’s basis in the property is reduced by the amount of the liability.
In a partnership, what happens to a partner’s basis when they receive a liquidating distribution?
A) The partner must recognize the entire gain if the distribution exceeds their basis.
B) The partner’s basis is unaffected by the distribution.
C) The partner’s basis is increased by the value of the distributed assets.
D) The partner’s basis is reduced by the fair market value of the assets distributed.
What is the effect of a distribution of cash to a partner from a partnership?
A) The partner must recognize income to the extent the distribution exceeds their basis in the partnership.
B) The distribution is tax-free and does not affect the partner’s basis.
C) The partner’s basis is reduced by the amount of the cash distribution.
D) The partner’s basis is increased by the amount of the cash distribution.
How is a partner’s basis in a partnership interest affected when they receive a distribution of appreciated property?
A) The partner’s basis increases by the fair market value of the property.
B) The partner’s basis decreases by the fair market value of the property.
C) The partner’s basis is unaffected by the distribution.
D) The partner’s basis is adjusted based on the fair market value of the property, but only if the property is sold later.
If an S-Corporation distributes appreciated property to a shareholder, how is the transaction treated for tax purposes?
A) The transaction is treated as a sale of property by the corporation, and the gain is passed through to the shareholders.
B) The transaction is treated as a taxable event to the shareholder, with the gain recognized on the difference between the distribution and the basis of the property.
C) The distribution is tax-free if the shareholder holds the property for at least one year.
D) The transaction is exempt from tax and only reduces the shareholder’s basis in the S-Corporation.
How does an S-Corporation handle a distribution of cash to a shareholder?
A) The distribution is taxable to the shareholder as ordinary income.
B) The distribution is tax-free as long as it does not exceed the shareholder’s basis in the S-Corporation.
C) The distribution is always taxable, regardless of the shareholder’s basis.
D) The distribution is taxable as a dividend, regardless of the shareholder’s basis.
What is the result of a partnership distributing property that has a liability attached to it to a partner?
A) The partner assumes the liability and adjusts their basis accordingly.
B) The liability is ignored for tax purposes, and the partner’s basis remains unchanged.
C) The partner recognizes a gain to the extent the liability exceeds the partner’s basis.
D) The partner must recognize income equal to the fair market value of the property distributed.
How does a self-employed individual who owns a partnership interest calculate their net earnings for self-employment tax purposes?
A) They only include their salary, not their share of partnership income.
B) They include their share of partnership income, including guaranteed payments for services.
C) They include only their share of the partnership’s capital gains.
D) They do not include any partnership income in their self-employment tax calculation.
What happens if an S-Corporation distributes property to a shareholder that has a liability attached to it?
A) The shareholder is deemed to have received the fair market value of the property minus the liability.
B) The distribution is tax-free and the liability is ignored.
C) The shareholder assumes the liability and adjusts their basis accordingly.
D) The shareholder must recognize income equal to the liability attached to the property.
What is the tax effect when an S-Corporation has built-in gains at the time of a distribution to a shareholder?
A) The distribution is subject to corporate-level tax before being passed through to the shareholders.
B) The distribution is treated as taxable income to the shareholders, but no additional corporate-level tax is imposed.
C) The shareholders pay tax on the built-in gains at the corporate level, and the distribution is tax-free.
D) The distribution is not taxable if the built-in gain is held for more than one year.
What is the tax treatment for guaranteed payments made by a partnership to a partner?
A) Guaranteed payments are treated as distributions and are not subject to self-employment tax.
B) Guaranteed payments are treated as ordinary income to the partner and are subject to self-employment tax.
C) Guaranteed payments are not subject to self-employment tax if the partner is a limited partner.
D) Guaranteed payments are treated as capital gains and are taxed accordingly.
How are distributions from a limited liability company (LLC) taxed when the LLC is treated as a partnership for tax purposes?
A) Distributions are always taxable as income, regardless of the LLC’s profits.
B) Distributions are treated as a return of capital to the extent of the member’s basis in the LLC.
C) Distributions are subject to self-employment tax.
D) Distributions are taxed at the corporate level before being passed to the members.
When does a partner’s basis in their partnership interest decrease?
A) When the partnership earns income.
B) When the partner receives a distribution from the partnership.
C) When the partner assumes additional liabilities.
D) When the partnership acquires new assets.
What is the effect of an S-Corporation making a distribution of cash to a shareholder?
A) The distribution is treated as income to the shareholder and is subject to tax.
B) The distribution reduces the shareholder’s basis in the S-Corporation.
C) The distribution is treated as a capital gain to the shareholder.
D) The distribution is tax-free and does not affect the shareholder’s basis.
If a partnership distributes property with a fair market value greater than the partner’s basis in the partnership interest, how is the distribution treated?
A) The partner recognizes income equal to the excess of the fair market value over the basis in the partnership interest.
B) The partner recognizes capital gain on the distribution.
C) The partner does not recognize any income or gain.
D) The partner recognizes ordinary income on the difference between the fair market value and the basis.
How does an S-Corporation shareholder’s basis in the corporation change after receiving a distribution?
A) The shareholder’s basis increases by the amount of the distribution.
B) The shareholder’s basis remains unchanged unless the distribution exceeds the basis.
C) The shareholder’s basis decreases by the amount of the distribution.
D) The shareholder’s basis is adjusted based on the corporation’s earnings.
How does a partner’s basis in a partnership interest change when the partnership incurs a new liability?
A) The partner’s basis increases by their share of the liability.
B) The partner’s basis decreases by their share of the liability.
C) The partner’s basis is unaffected by changes in partnership liabilities.
D) The partner must recognize income equal to their share of the liability.
What happens when an S-Corporation makes a non-liquidating distribution to a shareholder?
A) The distribution is taxable to the shareholder as a dividend.
B) The distribution reduces the shareholder’s basis in their stock and is not taxable unless it exceeds the shareholder’s basis.
C) The distribution is taxable to the shareholder as ordinary income.
D) The distribution is treated as a capital gain, regardless of the shareholder’s basis.
When a partner contributes property subject to a liability to a partnership, how is the liability treated for tax purposes?
A) The liability is ignored for basis purposes.
B) The partner’s basis is reduced by the liability amount, and they may recognize gain.
C) The liability is considered a loan from the partnership to the partner.
D) The liability is treated as an increase in the partner’s basis in the partnership interest.
What is the primary characteristic of a pass-through entity?
A) It is taxed at the entity level, and its income is then passed to shareholders.
B) Its income is not subject to taxation at the entity level, but is passed directly to its owners.
C) The owners of the pass-through entity are subject to self-employment tax.
D) The entity’s income is taxed at a flat rate, regardless of the owner’s tax bracket.
What happens when a partnership makes a distribution of property to a partner in a non-liquidating situation?
A) The partner must recognize gain to the extent that the fair market value of the property exceeds their basis in the partnership interest.
B) The partner recognizes no gain or loss on the distribution of property.
C) The partnership recognizes gain or loss, and the partner is taxed on the entire amount.
D) The distribution is treated as a capital gain transaction.
How are guaranteed payments made to a partner in a partnership taxed?
A) Guaranteed payments are treated as dividends.
B) Guaranteed payments are considered taxable income and are subject to self-employment tax if the partner provides services.
C) Guaranteed payments are tax-exempt income to the partner.
D) Guaranteed payments are treated as a return of capital and are not taxable.
If a limited liability company (LLC) has elected to be taxed as an S-Corporation, how are distributions treated for tax purposes?
A) Distributions are taxed as ordinary income to the shareholders.
B) Distributions are tax-free to the extent of the shareholder’s basis in the LLC.
C) Distributions are subject to self-employment tax.
D) Distributions are taxed at the corporate rate, and then at the shareholder level.
When a partner’s interest in a partnership is sold, what is the tax treatment of the sale?
A) The sale is treated as a sale of capital assets, subject to capital gains tax.
B) The sale is treated as ordinary income, and the partner must recognize gain based on their original contribution.
C) The sale is treated as a dividend and taxed accordingly.
D) The sale is not taxable if the partnership continues operations after the sale.
What is the effect of a partnership’s operating agreement on the allocation of profits and losses among the partners?
A) The operating agreement determines the allocation of profits and losses, regardless of each partner’s ownership percentage.
B) The operating agreement must allocate profits and losses equally among all partners.
C) The operating agreement cannot alter the default allocation prescribed by tax law.
D) The operating agreement cannot affect how income is allocated, but it can determine when distributions are made.
How does the IRS treat the loss on a partnership distribution of property to a partner?
A) The loss is immediately recognized if the fair market value of the property is less than the partner’s basis.
B) The loss is not recognized unless the property is later sold by the partner.
C) The loss is deducted on the partner’s personal tax return.
D) The loss is not recognized at the entity level, but the partner may recognize it later upon disposition of the property.
What is the general tax treatment of distributions from a partnership to its partners?
A) Distributions are taxed as ordinary income, regardless of the nature of the distribution.
B) Distributions of property are not taxable unless the property exceeds the partner’s basis.
C) Distributions are taxable as dividends.
D) Distributions are always tax-free.
What happens if a partnership distributes property that is subject to debt to a partner?
A) The partner must include the debt as income equal to the fair market value of the property.
B) The partner’s basis in the property is reduced by the amount of the debt attached to it.
C) The partner assumes the debt and adjusts their basis accordingly.
D) The distribution is taxable only if the property is sold at a later date.
How does a partner calculate the amount of income subject to self-employment tax?
A) Only income from capital gains is subject to self-employment tax.
B) Income derived from guaranteed payments and the partner’s share of ordinary income is subject to self-employment tax.
C) Only guaranteed payments are subject to self-employment tax.
D) All distributions from a partnership are subject to self-employment tax.
What happens to a partner’s basis when they contribute property subject to a liability to the partnership?
A) The partner’s basis is reduced by the amount of the liability.
B) The partner’s basis remains unaffected by the liability.
C) The liability is considered a contribution of capital, and the basis is increased.
D) The partner’s basis is increased by the amount of the liability.
How is a non-liquidating distribution from an S-Corporation treated for tax purposes?
A) The distribution is subject to income tax only if it exceeds the shareholder’s basis in the stock.
B) The distribution is always taxable as a dividend.
C) The distribution is not taxable as long as the corporation has sufficient income to cover the distribution.
D) The distribution is subject to corporate tax before being passed through to the shareholders.
What is the consequence if an S-Corporation has a passive investment income that exceeds 25% of its gross receipts for three consecutive years?
A) The S-Corporation will be disqualified from S-Corporation status.
B) The S-Corporation must pay a tax on the passive investment income.
C) The S-Corporation must make additional distributions to shareholders.
D) The S-Corporation will not be taxed on passive income if it is distributed to shareholders.
How are distributions to limited partners typically treated for tax purposes?
A) Distributions to limited partners are always taxable as ordinary income.
B) Distributions to limited partners are treated as a return of capital, reducing their basis in the partnership interest.
C) Distributions to limited partners are subject to self-employment tax.
D) Distributions to limited partners are subject to both income tax and self-employment tax.
What happens if an S-Corporation distributes property that has appreciated in value to a shareholder?
A) The S-Corporation recognizes gain on the distribution, and the shareholder recognizes gain on the difference between the fair market value and their basis in the property.
B) The shareholder recognizes gain on the distribution, and the S-Corporation does not recognize gain.
C) The distribution is tax-free, and no gain is recognized by either party.
D) The S-Corporation is not allowed to distribute appreciated property.
How is a partner’s share of a partnership’s liabilities treated in calculating their basis in the partnership?
A) A partner’s basis is unaffected by the partnership’s liabilities.
B) A partner’s basis increases by their share of the partnership’s liabilities.
C) A partner’s basis is reduced by their share of the partnership’s liabilities.
D) A partner’s basis is determined by the total amount of liabilities assumed by the partnership.
When does a partner recognize gain on a distribution from a partnership?
A) When the partner receives a distribution that exceeds their basis in the partnership.
B) When the distribution is less than the partner’s basis in the partnership.
C) When the partnership distributes cash or property to the partner.
D) When the partnership incurs a new liability.
If a partnership sells a property for more than its basis, what is the tax treatment of the gain?
A) The gain is passed through to the partners and is taxed at the individual level.
B) The gain is taxed at the partnership level before being passed through to the partners.
C) The gain is not taxable unless the property is sold to an unrelated third party.
D) The gain is taxed as a capital gain at the entity level.
How does the IRS treat the distribution of property with a liability attached to it in a partnership?
A) The partner assumes the liability, and their basis is adjusted accordingly.
B) The partner must recognize gain to the extent the liability exceeds their basis in the partnership.
C) The partnership must recognize income equal to the liability attached to the property.
D) The partner does not assume the liability and must reduce their basis by the fair market value of the property.