Reg Cpafree Partnership & Scorp Memorize

Front 1

An S corporation is taxed very much as a partnership.

Back 1

Certain income and expense items pass directly through to the owners and have the same tax consequences. Thus, the S corporation (and the partnership) do not pay income taxes but the impact is reported by the owners on their own tax returns. If a net loss results, the owner can use that the appropriate portion of that loss to reduce taxable income up to the capital basis invested.

Front 2

In filing a partnership income tax return, what is the purpose of Schedule K?

Back 2

Schedule K is used to indicate how specified revenues and expenses of the partnership are passed through to the various partners.

Partnerships and S corporations do not pay income taxes but rather specific items such as rental income and interest income are passed through directly to the tax returns of the individual partners. The amounts to be allocated are very important as well as the net ordinary income that remains after these allocations. The partnership files its tax return on a Form 1065. Schedule K of that form provides the essential information about these allocations.

Front 3

For a partnership, the at-risk balance is_______

Back 3

(the total amount that could eventually be reported as a loss from the partnership) includes the capital in the business as well as loans to the business. In addition, because partners can be held liable for the debts of a partnership, it includes each partner's share of the debts of the partnership. Getting a loan - increases at-risk balance.

Front 4

The partnership of Randolph and Macon operates in central Virginia. Total capital is $200,000, $150,000 for Randolph and $50,000 for Macon. They allow Ashland to enter the partnership with a 30 percent ownership by contributing land and a building. This property has a fair value of $120,000 but a tax basis to Ashland of $92,000. What gain should Ashland recognize on this exchange of the property for ownership in this partnership?

Back 4

A Zero

Because of the legal connection between a partner and a partnership, the tax basis normally does not change as a result of a conveyance. The partnership will continue to use the tax basis of $92,000 and Ashland will have an interest in the partnership with a tax basis of $92,000. Because this basis is not affected, there is no gain or loss that can be recognized.

Front 5

Andrew buys land on July 9, Year One. Later, on October 2, Year Four, he and Jackson form a partnership. Andrew contributes the property to the partnership as part of his capital investment. On February 6, Year Five, this partnership sells the land and is now trying to determine the capital gain or loss to pass through to the two partners. What is the holding period of this land as reported by this partnership?

Back 5

In a partnership or S corporation, the tax basis of conveyed property between owner and business is retained because the partners are not viewed as a legal entity separate from the partnership. Because the tax basis stays the same, the holding period should also stay the same. The holding period to the partner was the July 9, Year One, date of purchase and that is also used by the partnership.

Front 6

On January 1, Year One, Ramierez contributes cash of $30,000 and equipment with a tax basis of $12,000 but a fair value of $21,000 to a new business called STR Partnership. As a result Ramierez becomes a partner with a 40 percent ownership. In Year One, the business reports total income of $70,000 and paid each partner $20,000 in cash. What was Ramierez's capital basis in this business at the end of Year One?

Back 6

In a partnership or S corporation, property conveyed to or from an owner keeps its tax basis. Therefore, the initial investment by Ramierez is viewed as $42,000 ($30,000 in cash plus equipment with a $12,000 tax basis to the partner). This partner is entiteld to 40 percent of the income ($28,000 or $70,000 times 40 percent). The cash distribution of $20,000 reduces the capital investment (in both a partnership and an S corporation). Consequently, by the end of the year the capital investment is $50,000 ($42,000 plus $28,000 less $20,000).

Front 7

One of the partners in a partnership sells his share of the business. According to the tax rules, this sale was large enough to create a partnerhsip termination of the old partnership. What is the significance of this termination?

Back 7

Partnerships can change small amounts of ownership without any tax impact. However, if too much of the ownership is changed, it is viewed as a termination. From a tax perspective, the assets are assumed to be distributed and then contributed back to the new partnership. In most cases, that does not cause any tax changes. However, especially if the partnership is holding significant amounts of cash, the distribution can create tax effects for the partners.

Front 8

David Dyson owns 100 percent of D&D Incorporated which is an S corporation for income tax purposes. David's basis in the company at the beginning of the year is $60,000. During the year the company had ordinary income of $39,500, municipal bond interest income of $10,000, and short-term capital losses of $17,000. David also received a dividend of $20,000. What is David's basis in this corporation at year end?

Back 8

The basis of an S corporation for a shareholder is increased by all income items including tax exempt income and decreased by all loss and deduction items including non deductible expenses and distributions. David's basis of $60,000 is increased by the ordinary income of $39,500 plus $10,000 for the municipal bond interest income. It is reduced by the amount of the capital loss of $17,000 and the distribution of $20,000. That leaves an ending basis of $72,500

Front 9

Apple and Bear are equal partners in a partnership. Cat becomes a 40 percent partner by contributing property with a tax basis of $400,000 and a fair value of $550,000 to the partnership. This property has a $100,000 liability attached to it which is accepted by the partnership. What is Cat's at-risk basis in this partnership?

Back 9

When property is conveyed to a partnership or S corporation, the tax basis is retained. Thus, this new partner has a capital investment of $300,000 (the $400,000 tax basis less the $100,000 liability that was also conveyed). For the at-risk basis, a partnership (but not an S corporation) also recognizes that the partners are ultimately responsible for the debts that are incurred. This partnership has just accepted a $100,000 liability. As a 40 percent partner, Cat is viewed as responsible for $40,000 of that debt. Thus, Cat has an at-risk basis of $340,000 ($300,000 capital plus a $40,000 responsibility for the added debt).

Front 10

Brendan is a 27 percent owner of the Brendan-Jamin Partnership. He has an adjusted basis in this partnership of $23,000. Near the end of the current year, Brendan is given cash of $11,000 as a distribution from the partnership. He also receives land that has a tax basis to the partnership of $15,000 but a fair value of $19,000. After receiving this distribution, what is the tax basis of the land to Brendan?

Back 10

In partnerships and S corporations, conveyances between an owner and the business are typically reported for tax purposes by retaining the tax basis. Thus, the answer to this question is usually going to be the $15,000 basis of the property to the partnership. However, if the basis received ($26,000 or $11,000 cash plus $15,000 land) exceeds the owner's basis in the business, the basis of the items received must be reduced to the owner's basis ($23,000). The cash and land received must be recorded at a total of $23,000. The cash is $11,000 so the land must be picked up by the owner at the $12,000 residual amount. Because $23,000 is recorded by the partner but the basis is reduced by $23,000, no gain is recorded. A gain would have only been recorded if the cash received had exceeded $23,000.

Front 11

Noah is a 34 percent owner of the Noah-Lily Partnership. He has an adjusted basis in this partnership of $28,000. Near the end of the current year, Noah is given cash of $30,000 as a distribution from the partnership. He also receives land that has a tax basis to the partnership of $4,000 but a fair value of $7,000. After receiving this distribution, what is the tax basis of the land to Noah?

Back 11

In partnerships and S corporations, conveyances between an owner and the business are typically reported for tax purposes by retaining the tax basis. Thus, the answer to this question is usually going to be the $4,000 basis of the property to the partnership. However, if the cash received exceeds the owner's basis in the business, a gain for the excess is recgonized and any additional property is recorded with a zero basis. Here, the cash is $30,000 but the partner's basis in that partnership is only $28,000. The additional $2,000 is a gain for Noah and the land has no tax basis. This situation is one of the very few times that a gain can result from a transaction between an owner and a partnership or S corporation.

Front 12

Charlotte is a 38 percent owner of the Charlotte-Emma Partnership. She has an adjusted basis in this partnership of $31,000. Near the end of the current year, Charlotte is given cash of $35,000 as a distribution from the partnership. She also receives land that has a tax basis to the partnership of $3,000 but a fair value of $5,000. After receiving this distribution, what gain should Charlotte recognize for tax purposes?

Back 12

In partnerships and S corporations, conveyances between an owner and the business are typically reported for tax purposes by retaining the tax basis so that no gain or loss is created. Thus, the answer to this question is usually going to be zero. However, if the cash received exceeds the owner's basis in the business, a gain for the excess is recgonized and any additional property is recorded with a zero basis. Here, the cash is $35,000 but the partner's basis in that partnership is only $31,000. The additional $4,000 is a gain for Charlotte and the land has no tax basis to her. This situation is one of the very few times that a gain can result from a transaction between an owner and a partnership or S corporation.

Front 13

Arlo Hampton has been asked to join the Arlington Partnership. According to the arrangement that has been worked out, Hampton will contribute land and a building with a total tax basis of $500,000 but a fair value of $900,000. There is a $300,000 note payable on the property and the partnership has agreed to accept that liability also. In exchange for this contribution, Hampton will receive a 40 percent interest in the partnership. Assuming that this transaction is finalized, what is the new partner’s at-risk basis in the new partnership?

Back 13

A partnership is not viewed as a legal entity separate from its owners. Consequently, contributions retain their tax basis rather than being adjusted to fair value. Hampton conveys property with a $500,000 tax basis and a $300,000 note payable so the capital contribution is the net $200,000. In addition, again because of the lack of legal separation, the partners are also responsible for their share of any partnership debts. As a 40 percent partner, Hampton continues to be responsible for $120,000 of the $300,000 debt that is now owed by the partnership. Hampton is risking $320,000 (capital contribution of $200,000 plus $120,000 share of liabilities).

Front 14

Harland A. Heathcliff is a partner in a major law firm. His basis in this partnership is $32,000. Heathcliff is given a nonliquidating distribution of land with a fair value of $50,000. Which of the following statements is true?


A If the land has a tax basis to the partnership of $43,000, Heathcliff must recognize a taxable gain of $11,000.
B If the land has a tax basis to the partnership of $43,000, the partnership must recognize a taxable gain of $7,000.
C If the land has a tax basis to the partnership of $43,000, Heathcliff will retain that same tax basis in his records.
D If the land has a tax basis to the partnership of $43,000, Heathcliff will recognize the land with a tax basis of $32,000.

Back 14

The correct answer was D.

The normal rule for nonliquidating distributions is that the tax basis is retained so that no income is recognized by either the partnership or the partner.
The partner picks up the property at this tax basis ($43,000) and reduces his basis in the partnership by that same amount. However, a problem arises when the basis of the property received is larger than the basis reported by the partner for the partnership as a whole. Then, unless cash is received that is greater than the basis in the partnership, the new property is recorded at an amount that is equal to the basis in the partnership. Here, because the $43,000 basis exceeds the basis reported by Heathcliff in the partnership, the land will be reported by this partner at $32,000. No gain or loss is reported; the land simply moves from partnership to partner but the upper limit of recognition for the partner is the basis in the partnership.

Front 15

Nancy and Drew have been equal partners in the Mystery Partnership for a number of years. During the current year, Nancy was given a cash distribution of $5,000 along with land having a tax basis of $30,000 and a fair value of $40,000. Which of the following statements is true?


A If this is a nonliquidating distribution and Nancy has a basis in the partnership of $46,000, she will have a tax basis for the land of $40,000.
B If this is a nonliquidating distribution and Nancy has a basis in the partnership of $46,000, she will report taxable income of $5,000.
C If this is a liquidating distribution and Nancy has a basis in the partnership of $46,000, she will have a tax basis for the land of $41,000.
D If this is a liquidating distribution and Nancy has a basis in the partnership of $46,000, she will report taxable income of $5,000.

Back 15

The correct answer was C.

In a nonliquidating distribution from a partnership, the tax basis of the property is normally retained and the partner’s basis in the partnership is reduced by the same amount so that no gain or loss is recognized. A gain is only possible if the cash received exceeds the tax basis of the partnership.

In a liquidating distribution, the tax basis of the partnership is first removed from the records of the partner and the received property is then recorded at this same amount. The $46,000 basis is removed and the cash received is recorded at $5,000. The remaining $41,000 is the basis for the land. No gain or loss is recorded. A gain is only possible if the cash received exceeds the tax basis of the partnership.

Front 16

Venus owns 30 percent of a corporation. Serena owns 30 percent of a different corporation. Both of these corporations reported operating income this year (sales minus cost of goods sold and other operating expenses) of $200,000. Both corporations made a total cash distribution to the owners of $80,000. The company that Venus owns an interest in is a C corporation. The company that Serena owns an interest in is an S corporation. Which of the following statements is true?


A Serena will report $36,000 more in taxable income this year from this ownership than Venus will report.
B Serena will report $60,000 more in taxable income this year from this ownership than Venus will report.
C Serena and Venus will report the same amount of taxable income this year from their ownership.
D Venus will report $24,000 more in taxable income this year from this ownership than Serena will report.

Back 16

The correct answer was A.

Most corporations are C corporations. They pay an income tax on their own taxable income and owners are only taxed when dividends are distributed. Venus owns part of a C corporation so that she must report dividend income this year of $24,000 ($80,000 distribution times 30 percent ownership. Some companies qualify as S corporations. They pay no income taxes but allocate pass through items and ordinary income to their partners. Serena will report $60,000 based on her ownership of this S corporation ($200,000 ordinary income times 30 percent ownership). Serena’s taxable income is $36,000 higher than that of Venus ($60,000 less $24,000).

Front 17

Which of the following items does not pass through directly to the partners of a partnership but is included in arriving at the ordinary income of the partnership?


A Rent revenue earned by the partnership.
B Capital gains earned by the partnership.
C Charitable contributions made by the partnership.
D Guaranteed payments made to partners to compensate them for work done in the partnership.

Back 17

The correct answer was D.

Partnerships file income tax returns but do not pay any income taxes. Instead, certain items such as rent and royalty income, capital gains and losses, dividend and interest revenue, and charitable contributions pass directly through the tax return of the individual partners. All other items are lumped together to arrive at an ordinary income figure that is also allocated to the individual partners. A guaranteed payment to a partner is viewed as an expense of the business in determining the ordinary income for the year and as income for that specific partner.

Front 18

An S corporation has a capital gain of $4,000, interest revenue of $5,000, and sales of inventory of $30,000. The S corporation has 10 equal owners. What is the tax effect relating to these three items?


A Each owner reports a $400 capital gain and ordinary income of $3,500.
B Each owner reports ordinary income of $3,900.
C Each owner reports dividend revenue of $500 and ordinary income of $3,400.
D Each owner reports a capital gain of $400, interest revene of $500, and ordinary income of $3,000.

Back 18

The correct answer was D.

Partnerships and S corporations do not pay income taxes but rather specific items such as capital gains and interest revenue are passed through directly to the tax returns of the individual owners. Because there are ten equal owners of this S corporaiton, each is allocated 10 percent of the capital gain ($400) and 10 percent of the interest revenue ($500) which appear at the approrpriate spot on their tax returns. All remaining items (only the sales of inventory here) are accumulated into a single ordinary inocme figure ($30,000) so that each partner recognizes the appropriate share ($3,000) within ordinary income. Pass through items normally have some special tax limitation or effect that has to be noted on the individual return.

Front 19

The Up and Down Partnership has several revenues and expenses this year. Sales of inventory amounted to $600,000, cost of goods sold and other operating expenses were $410,000, dividend revenue was $8,000, long-term capital gains were $9,000, and charitable contributions amounted to $11,000. These balances gave the partnership a net income of $196,000. For income tax purposes, what is the ordinary income for this partnership that should be allocated to the various partners?

Back 19

For a partnership, a number of revenues and expenses are separated and passed through directly the income tax returns of the individual partners. Remaining items are lumped together to determine ordinary income. Dividend revenue, capital gains and losses, and charitable contributions are all pass-through items. That leaves sales of $600,000 and cost of goods sold and operating expenses of $410,000 for an ordinary income figure of $190,000.

Front 20

In the current year, the Walden Corporation (an S corporation for tax purposes) reported a total profit of $90,000 and paid cash distributions to its owners of $40,000. The company has 20 equal partners. The total profit was made up of revenues of $200,000, expenses of $140,000, and a long-term capital gain of $30,000. What should be reported by each of the owners on their own income tax returns?

Back 20

In a partnership or S corporation, distributions to the owners are reducements in the tax basis and, normally, do not have an income effect.
Here, the long-term capital gain is a pass-through item so that each owner recognizes a $1,500 portion of the gain ($30,000 allocated to 20 owners). The ordinary income of $60,000 (revenues of $200,000 less operating expenses of $140,000) is also allocated to the owners. Thus, their ordinary income increases by $3,000 each ($60,000 allocated to 20 owners).

Front 21

Columbus is a partner in New World Partnership. He also works in the operations of this business. He receives a guaranteed salary for his work of $2,000 per month. At the end of the year, he also receives a distribution that is equal to 32 percent of the profits for that year. On December 31 of this year, he received a check for $38,000 as his portion of the profits. In determining the ordinary income of the partnership for tax purposes this year, how much of these payments will be viewed as an expense?

Back 21

A guaranteed salary to a partner for work done is considered an expense of the business and should be deducted in determining ordinary income for the year for tax purposes. In a partnership or S corporation, distributions to the owners such as the one paid here for $38,000 are viewed as returns of their capital and is viewed as a reduction of the capital investment rather than as income (to the owner) and expense (to the business). Hence, the expense to be recognized is the guaranteed salary of $24,000 ($2,000 per month for 12 months).

Front 22

Thomas was a partner with Jefferson in the TJ Partnership. Thomas was allocated 40 percent of all profits and losses. During Year One, the accountants for the business determined net income to be $200,000. That total included a guaranteed salary of $60,000 paid to Thomas as well a charitable contribution to the local church of $12,000. What was the increase from these events in the adjusted gross income reported by Thomas on his income tax return?

Back 22

The correct answer was B.

In determining the tax impact for partnerships and S corporations, certain revenues and expenses are separated and passed through directly to the partners. Charitable contributions are passed through in this way but guaranteed salary payments to the partners are not. Thus, the ordinary income of this partnership is the $200,000 income figure after removing the $12,000 in charitable contributions. Removing a reduction causes the remaining number to be higher. Thus, the ordinary income is $212,000 after the charitable contribution is handled separately. Thomas is entitled to 40 percent of that amount or $84,800. Thomas also received a guaranteed salary of $60,000 which is an expense to the business but income to the owner. Total impact on the taxable income of this partner is $144,800 ($84,800 plus $60,000). Thomas is also able to recognize 40 percent of the charitable contribution but that affects income after adjusted gross income.

Front 23

Bob Fischer and Tonie Alexander formed a partnership four years ago and is has been relatively successful since that time. They are equal partners. In the current year, the business generated revenues of $900,000, dividend revenue of $70,000, rental income of $30,000, cost of goods sold of $600,000, utility expenses of $90,000, and depreciation expense of $30,000. In addition, the business made several charitable contributions with a total value of $22,000. Both Fischer and Alexander received cash distributions this year of $24,000. On Fischer’s individual tax return for this year, what should be reported as the ordinary income (net business income) from this partnership?

Back 23

Partnerships do not pay income taxes. Instead, specific items pass through directly to the tax returns of the separate partners. For this partnership, these pass-through items are the dividend revenue, rental income, and the charitable contributions. All remaining revenues and expenses are accumulated to arrive at the ordinary income of the partnership. This net amount is then also allocated to the partners. This partnership has ordinary income of $180,000 ($900,000 less all of the following: $600,000, $90,000, and $30,000) so that each of the equal partners must report partnership income of $90,000 ($180,000 times 50 percent). In most cases, cash distributions made to a partner is not taxable income.

Front 24

The Regostino Company is an S Corporation. During the current year, it reported the following results: $25,000 ordinary income (revenues minus cost of goods sold and other operating expenses), $1,100 in tax-exempt interest income, $100 interest expense, $800 in charitable contributions, and a section 179 deduction of $3,400. What is the income tax expense for Regostino? Assume a corporate tax rate of 20 percent.

Back 24

S Corporations (like partnerships) are flow-through entities. This term means that the shareholders of the S-Corporation report and pay individual income tax rates on their portion of income, deductions, and credits reported by the company. Some items such as charitable contributions, interest expense, and Section 179 deductions are assigned to the owners individually and reported directly by them. All remaining taxable income items are lumped together and reported as a single operating income figure to be allocated among the owners for their returns. However, the S corporation itself does not pay income taxes.

Front 25

Brittani holds a 30 percent ownership interest in the Holden Partnership with an adjusted basis in this business of $13,000. The partnership conveys cash of $4,000 to her along with land that had a tax basis to the partnership of $10,000 but a fair value of $17,000. The partnership is not going out of business so this transfer is a nonliquidating distribution. Once Brittani receives the cash and the land, what is the tax basis of the land on her personal financial records?

Back 25

Nonliquidating distributions from a partnership are normally tax free. They simply reduce the partner’s basis in the partnership. If they are tax free, tax basis usually remains the same. Normally, then, the basis of $10,000 would move with the land and be the basis to Brittani. One major exception exists and that can be seen here. Keeping the basis means that Brittani would record the cash at $4,000 and the land at $10,000. That transfer would reduce her basis in the partnership to a negative amount ($1,000). The rules hold that her basis in the partnership can only be reduced to zero by such a distribution. That means the reduction can only be $13,000 as a maximum. Cash has to be recorded at $4,000 so the other $9,000 of the reduction is the basis picked up by the owner for the land. This alternative is required because keeping the old basis drops her basis in the partnership to a negative.

Front 26

The ABCD partnership has sales revenue of $300,000, cost of goods sold of $200,000, long-term capital gain of $12,000, repair expense of $20,000, and charitable contributions of $8,000. John Apple is one of the partners who holds a 25 percent share of the partnership. How should Mr. Apple report this partnership income on his own income federal tax return?

Back 26

For the taxation of a partnership (or an S corporation), certain items such as long-term capital gains, charitable contributions, and interest expense are passed through directly to each partner based on the ownership percentage. Apple owns 25 percent of the partnership so that portion of the long-term capital gain and the charitable contribution are passed through directly and shown as such on his own return. All other income effects are then gathered into a single figure which is the income of the partnership and is then assigned to the individual partners based on ownership percentage. Here, the $100,000 gross profit minus $20,000 repair expense gives income of $80,000 so that this 25 percent owner is assigned $20,000 as the income from the partnership.

Front 27

For the current year, a partnership has sales revenue of $500,000, cost of goods sold of $300,000, capital gains of $60,000, salary expenses of $120,000, and charitable contributions of $30,000. If there are two equal partners, what does each report of their separate income tax returns?

Back 27

Partnership income of $40,000, capital gains of $30,000, and charitable contributions of $15,000.

In a partnership, certain income and expense items (including capital gains and charitable contributions) are passed through directly to the partner’s own individual tax return. All other items (such as revenues, cost of goods sold, and other expenses such as salary expense) are netted together to form the basic partnership income that is also allocated to the separate partners based on the appropriate ratio which, in this case, was 50-50.

Front 28

A partnership is formed when A contributes $70,000 in cash and B contributes $50,000. The partners share all profits and losses evenly. The partnership borrows $10,000 from the bank. What is partner A’s at-risk balance?

Back 28

The at-risk balance of a partnership is the maximum amount of loss that a partner can deduct on his or her own income tax return as a result of losses incurred by the partnership.
It is the capital balance of the partner plus the portion of any partnership debt that the person is responsible for in case the business fails. Partner A has contributed $70,000 so that is the capital amount. The partnership has a $10,000 liability. Unless some arrangement was made, the partners are responsible for that debt if the business is unable to repay. Because they split profits and losses on an even basis, that means Partner A could have to contribute an additional $5,000 for a total at-risk balance of $70,000 plus $5,000 or $75,000.

Front 29

Partnerships do not pay income taxes. Instead, specific items pass through directly to the tax returns of the separate partners.Items like ________ pass directly through the tax return of the individual partners.

Back 29

rent and royalty income,
capital gains and losses,
dividend and interest revenue,
and charitable contributions