Taxation of Flow-Through Entities - CPA Regulation (REG)
Card 1 of 96
A partner sold a 25% interest in a partnership for $400,000 cash plus assumption of the partner's share of the partnership liabilities. The following additional information relates to the partnership activities:
- Partner's initial cash contribution: $ 100,000
- Partnership income during the partner's ownership time period: 1,000,000
- Partnership liabilities at date of sale: 60,000
- Partner's cash withdrawals: 50,000
How much gain is recognized by the partner upon the sale of the partnership interest?
A partner sold a 25% interest in a partnership for $400,000 cash plus assumption of the partner's share of the partnership liabilities. The following additional information relates to the partnership activities:
- Partner's initial cash contribution: $ 100,000
- Partnership income during the partner's ownership time period: 1,000,000
- Partnership liabilities at date of sale: 60,000
- Partner's cash withdrawals: 50,000
How much gain is recognized by the partner upon the sale of the partnership interest?
Tap to reveal answer
To determine the gain on the sale of the interest, the partner’s basis in the interest must first be determined:
- Initial Contribution: $100,000
- 25% Partnership Income over Period of Ownership: $250,000
- 25% Share of Partnership Liabilities: $15,000
- Partner’s Cash Withdrawals: $(50,000)
- Total Partnership Basis: $315,000
To determine the gain on the sale of the interest, the partner’s basis in the interest must first be determined:
- Initial Contribution: $100,000
- 25% Partnership Income over Period of Ownership: $250,000
- 25% Share of Partnership Liabilities: $15,000
- Partner’s Cash Withdrawals: $(50,000)
- Total Partnership Basis: $315,000
← Didn't Know|Knew It →
Taryn, Rose, and Summer are equal partners in TRS partnership. Taryn contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Rose contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Summer provided services worth $50,000. What amount of income is recognized as a result of the transfers?
Taryn, Rose, and Summer are equal partners in TRS partnership. Taryn contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Rose contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Summer provided services worth $50,000. What amount of income is recognized as a result of the transfers?
Tap to reveal answer
In formation of a partnership, the only two instances in which a gain (income) is recognized is when a partner contributes services in exchange for capital interest, or when property contributed is subject to a liability in excess of the property’s adjusted basis. Here, Summer provided services and so would recognize $50,000 of income. The other two partners would recognize no gain on their contribution of property.
In formation of a partnership, the only two instances in which a gain (income) is recognized is when a partner contributes services in exchange for capital interest, or when property contributed is subject to a liability in excess of the property’s adjusted basis. Here, Summer provided services and so would recognize $50,000 of income. The other two partners would recognize no gain on their contribution of property.
← Didn't Know|Knew It →
In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is:
In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is:
Tap to reveal answer
In the absence of election to adopt an annual accounting period, the required tax year for a partnership is the tax year of one or more partners who have more than 50% interest in aggregate of profits and capital, per the majority interest rule
In the absence of election to adopt an annual accounting period, the required tax year for a partnership is the tax year of one or more partners who have more than 50% interest in aggregate of profits and capital, per the majority interest rule
← Didn't Know|Knew It →
Andrew contributed the following assets to a partnership in exchange for a 50% interest in the partnership’s capital and profits: Cash of $50,000, Equipment with a FMV of $35,000 and Carrying amount of $25,000. Andrew’s basis in the partnership is:
Andrew contributed the following assets to a partnership in exchange for a 50% interest in the partnership’s capital and profits: Cash of $50,000, Equipment with a FMV of $35,000 and Carrying amount of $25,000. Andrew’s basis in the partnership is:
Tap to reveal answer
The basis of the partner’s interest in the partnership is calculated as $50,000 + $25,000 = $75,000.
The basis of the partner’s interest in the partnership is calculated as $50,000 + $25,000 = $75,000.
← Didn't Know|Knew It →
A partner’s basis in a partnership will increase by his or her share of liabilities assumed by the partnership.
A partner’s basis in a partnership will increase by his or her share of liabilities assumed by the partnership.
Tap to reveal answer
This statement is true and has no correlation with the TCJA or any other tax reform.
This statement is true and has no correlation with the TCJA or any other tax reform.
← Didn't Know|Knew It →
Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?
Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?
Tap to reveal answer
Since Strom contributed property subject to a liability, where the value of the liability exceeded the property, Strom begins with a negative basis of $(8,000). Strom’s partnership basis is increased by the assumption of the 25% share of the liability (=$6,000), bringing Strom’s basis up to $(2,000). Since a negative basis is not possible, Strom would have to recognize a gain to bring the partnership basis up to zero.
Since Strom contributed property subject to a liability, where the value of the liability exceeded the property, Strom begins with a negative basis of $(8,000). Strom’s partnership basis is increased by the assumption of the 25% share of the liability (=$6,000), bringing Strom’s basis up to $(2,000). Since a negative basis is not possible, Strom would have to recognize a gain to bring the partnership basis up to zero.
← Didn't Know|Knew It →
Lemon owned 2,000 shares of Spectrol Corp. common stock that were purchased in year 1 at $10.50 per share. In year 4, Lemon received a 5% non-taxable dividend of Spectrol common stock. In year 5, the stock split 2-for-1. In the current year Lemon sold 800 shares. What is Lemon's basis in the 800 shares of stock sold?
Lemon owned 2,000 shares of Spectrol Corp. common stock that were purchased in year 1 at $10.50 per share. In year 4, Lemon received a 5% non-taxable dividend of Spectrol common stock. In year 5, the stock split 2-for-1. In the current year Lemon sold 800 shares. What is Lemon's basis in the 800 shares of stock sold?
Tap to reveal answer
The original basis in the stock was $21,000 (2,000 shares at $10.50/share). The stock dividend of 5% increased the number of shares by 100 (2,000 * 5%), bringing the total shares to 2,100, while the basis remained the same ($21,000) and consequently the per share value decreased to $10/share. The stock split doubled the number of shares from 2,100 to 4,200, but the basis remained the same and the per share value was halved (from $10/share to $5/share). As a result, the 800 shares sold had a basis of $4,000 (800 shares * $5/share).
The original basis in the stock was $21,000 (2,000 shares at $10.50/share). The stock dividend of 5% increased the number of shares by 100 (2,000 * 5%), bringing the total shares to 2,100, while the basis remained the same ($21,000) and consequently the per share value decreased to $10/share. The stock split doubled the number of shares from 2,100 to 4,200, but the basis remained the same and the per share value was halved (from $10/share to $5/share). As a result, the 800 shares sold had a basis of $4,000 (800 shares * $5/share).
← Didn't Know|Knew It →
Mark and Mary formed MM, Inc. as an S corporation. Each contributed $50,000 in exchange for five shares of corporate stock. In addition, MM obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In MM's first year of operation, it reported a loss of $20,000 and did not make any distributions to the shareholders. What is Mark's basis in his MM shares at the beginning of the second year?
Mark and Mary formed MM, Inc. as an S corporation. Each contributed $50,000 in exchange for five shares of corporate stock. In addition, MM obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In MM's first year of operation, it reported a loss of $20,000 and did not make any distributions to the shareholders. What is Mark's basis in his MM shares at the beginning of the second year?
Tap to reveal answer
Mark began with a basis of $50,000, which was decreased by his 50% share of the operating loss of $20,000. As a result, his basis was $40,000 at the beginning of the second year. For S corporations, unlike partnerships, liabilities assumed by the corporation do not increase shareholders’ basis in the organization.
Mark began with a basis of $50,000, which was decreased by his 50% share of the operating loss of $20,000. As a result, his basis was $40,000 at the beginning of the second year. For S corporations, unlike partnerships, liabilities assumed by the corporation do not increase shareholders’ basis in the organization.
← Didn't Know|Knew It →
Steve received a one third interest in a partnership by contributing $3,000 in cash, stock with FMV of $5,000 and a basis of $2,000, and a new computer that cost Steve $2,500. Of the following, which amount represents Steve’s basis in the partnership?
Steve received a one third interest in a partnership by contributing $3,000 in cash, stock with FMV of $5,000 and a basis of $2,000, and a new computer that cost Steve $2,500. Of the following, which amount represents Steve’s basis in the partnership?
Tap to reveal answer
Steve’s basis in the partnership is calculated as $3,000 cash + $2,000 stock basis + $2,500 computer basis.
Steve’s basis in the partnership is calculated as $3,000 cash + $2,000 stock basis + $2,500 computer basis.
← Didn't Know|Knew It →
Gary is a 50% partner in ABC Partnership. Gary’s basis in ABC at the beginning of the year was $5,000. ABC made not distributions to the partners during the year and recorded the following items: $20,000 ordinary income, $8,000 tax exempt income, and $4,000 portfolio income. What is Gary’s tax basis in ABC at the end. Of the year?
Gary is a 50% partner in ABC Partnership. Gary’s basis in ABC at the beginning of the year was $5,000. ABC made not distributions to the partners during the year and recorded the following items: $20,000 ordinary income, $8,000 tax exempt income, and $4,000 portfolio income. What is Gary’s tax basis in ABC at the end. Of the year?
Tap to reveal answer
A partner’s basis is increased by the partner’s share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% * ($20,000 + $8,000 + $4,000) = $21,000
A partner’s basis is increased by the partner’s share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% * ($20,000 + $8,000 + $4,000) = $21,000
← Didn't Know|Knew It →
Payments from a partnership to a partner for services or the use of capital without regard to partnership income are:
Payments from a partnership to a partner for services or the use of capital without regard to partnership income are:
Tap to reveal answer
Guaranteed payments are essentially salary payments to a partner in the practice, however, they are treated differently as it is a payment to an owner of the entity.
Guaranteed payments are essentially salary payments to a partner in the practice, however, they are treated differently as it is a payment to an owner of the entity.
← Didn't Know|Knew It →
Two individuals are planning to start a business and need advice on selecting the appropriate form of entity. Their long-term business plan contemplates receiving future in-kind property distributions. Which of the following is a pair of business entities each of which can make a distribution of appreciation property to its owners that would not be taxable to the business entity or to its owners?
Two individuals are planning to start a business and need advice on selecting the appropriate form of entity. Their long-term business plan contemplates receiving future in-kind property distributions. Which of the following is a pair of business entities each of which can make a distribution of appreciation property to its owners that would not be taxable to the business entity or to its owners?
Tap to reveal answer
Property distributions by C corporations that are the result of earnings and profits are treated as taxable distributions to shareholders (as dividends), while distributions by S corporations may be taxable if the basis of the property is in excess of a shareholder’s basis or if the S corporation had undistributed prior C corporation earnings. Only in general partnerships, LLCs, or LLPs would a nonliquidating property distribution not be taxable.
Property distributions by C corporations that are the result of earnings and profits are treated as taxable distributions to shareholders (as dividends), while distributions by S corporations may be taxable if the basis of the property is in excess of a shareholder’s basis or if the S corporation had undistributed prior C corporation earnings. Only in general partnerships, LLCs, or LLPs would a nonliquidating property distribution not be taxable.
← Didn't Know|Knew It →
Partner A’s basis in partnership ABC is $5,000 at the beginning of the year. During the year, Partner A received a nonliquidating distribution of $3,000 cash and property with an adjusted basis of $4,000 and fair market value of $5,000. What was Partner A’s basis in the property received?
Partner A’s basis in partnership ABC is $5,000 at the beginning of the year. During the year, Partner A received a nonliquidating distribution of $3,000 cash and property with an adjusted basis of $4,000 and fair market value of $5,000. What was Partner A’s basis in the property received?
Tap to reveal answer
For nonliquidating distributions, the basis of the cash and property received cannot exceed the partner’s basis in the partnership, unless cash alone exceeds the partner’s basis. Cash is considered first in reducing the partner’s basis, which would lower the partner’s basis from $5,000 to $2,000. Then, if the partner’s basis is less than the NBV of the property received, the basis in the property is equal to the partner’s remaining basis, bringing the partner’s basis in the entity to zero.
For nonliquidating distributions, the basis of the cash and property received cannot exceed the partner’s basis in the partnership, unless cash alone exceeds the partner’s basis. Cash is considered first in reducing the partner’s basis, which would lower the partner’s basis from $5,000 to $2,000. Then, if the partner’s basis is less than the NBV of the property received, the basis in the property is equal to the partner’s remaining basis, bringing the partner’s basis in the entity to zero.
← Didn't Know|Knew It →
Slate’s basis in Arch Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Arch and a fair market value of $83,000. Arch had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was Slate’s recognized gain or loss in the distribution?
Slate’s basis in Arch Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Arch and a fair market value of $83,000. Arch had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was Slate’s recognized gain or loss in the distribution?
Tap to reveal answer
For nonliquidating distributions, none of the amount is taxable so long as the basis of the property and cash received (FMV is not considered) are not in excess of partner basis. Since the partner’s basis was $70,000, there was no cash received, and the property received had a NBV of $65,000, no gain or loss is recognized.
For nonliquidating distributions, none of the amount is taxable so long as the basis of the property and cash received (FMV is not considered) are not in excess of partner basis. Since the partner’s basis was $70,000, there was no cash received, and the property received had a NBV of $65,000, no gain or loss is recognized.
← Didn't Know|Knew It →
Harry’s adjusted basis in a partnership interest was $30,000. He received a nonliquidating distribution of $24,000 cash and land with a FMV and basis of $9,000. Harry’s basis for the land is:
Harry’s adjusted basis in a partnership interest was $30,000. He received a nonliquidating distribution of $24,000 cash and land with a FMV and basis of $9,000. Harry’s basis for the land is:
Tap to reveal answer
$30,000 - $24,000 = $6,000. The basis of property received in a distribution other than in liquidation of a partner’s interest, will generally be the same as the basis in the hands of the partnership immediately prior to distribution.
$30,000 - $24,000 = $6,000. The basis of property received in a distribution other than in liquidation of a partner’s interest, will generally be the same as the basis in the hands of the partnership immediately prior to distribution.
← Didn't Know|Knew It →
Alex is an individual and a partner in ABC Partnership with an adjusted basis of $30,000 in partnership interest. Alex received a non-liquidating distribution of $25,000 cash and property with an adjusted basis of $7,000 and a FMV of $10,000. What amount of gain should Alex recognize?
Alex is an individual and a partner in ABC Partnership with an adjusted basis of $30,000 in partnership interest. Alex received a non-liquidating distribution of $25,000 cash and property with an adjusted basis of $7,000 and a FMV of $10,000. What amount of gain should Alex recognize?
Tap to reveal answer
Gain is only recognized to the extent that cash distributed exceeds the adjusted basis of the partner’s interest in the partnership immediately before the distribution.
Gain is only recognized to the extent that cash distributed exceeds the adjusted basis of the partner’s interest in the partnership immediately before the distribution.
← Didn't Know|Knew It →
Partners of a partnership are subject to provisions which are basic limitations on losses and such any passive loss limitations on the losses passed through from their partnership.
Partners of a partnership are subject to provisions which are basic limitations on losses and such any passive loss limitations on the losses passed through from their partnership.
Tap to reveal answer
At-risk provisions apply when determining a possible deduction for a partner on their share of the partnership’s losses.
At-risk provisions apply when determining a possible deduction for a partner on their share of the partnership’s losses.
← Didn't Know|Knew It →
Which of the following conditions will prevent a corporation from qualifying as an S corporation?
Which of the following conditions will prevent a corporation from qualifying as an S corporation?
Tap to reveal answer
Eligibility requirements for S corps include limitations on who may be a shareholder (such as individuals, estates, trusts, and charitable organizations); the number of shareholders (no more than 100); and only one class of common stock (preferred stock is not permitted). However, differences in common stock voting rights are allowed.
Eligibility requirements for S corps include limitations on who may be a shareholder (such as individuals, estates, trusts, and charitable organizations); the number of shareholders (no more than 100); and only one class of common stock (preferred stock is not permitted). However, differences in common stock voting rights are allowed.
← Didn't Know|Knew It →
A company terminated its S corporation status for the current tax year. When can the company reelect S status?
A company terminated its S corporation status for the current tax year. When can the company reelect S status?
Tap to reveal answer
Once an S corporation has elected to terminate its status, the corporation must wait until the beginning of the fifth year after the year of termination before it can reelect S status.
Once an S corporation has elected to terminate its status, the corporation must wait until the beginning of the fifth year after the year of termination before it can reelect S status.
← Didn't Know|Knew It →
Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has:
Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has:
Tap to reveal answer
Election for S corporation status requires the agreement of all voting and nonvoting shareholders. Additionally, eligibility for election to S status is the same as eligibility for S corporations themselves: only certain persons may be a shareholder (such as individuals, estates, trusts, and charitable organizations – corporations and partnerships are not allowed); there may no more than 100 shareholders; and there may be only one class of common stock (preferred stock is not permitted).
Election for S corporation status requires the agreement of all voting and nonvoting shareholders. Additionally, eligibility for election to S status is the same as eligibility for S corporations themselves: only certain persons may be a shareholder (such as individuals, estates, trusts, and charitable organizations – corporations and partnerships are not allowed); there may no more than 100 shareholders; and there may be only one class of common stock (preferred stock is not permitted).
← Didn't Know|Knew It →