Multiple Choice Answers

1. Ray, Ronnie, and Joe are partners in a limited
partnership. Ray and Ronnie, the limited partners, each own 45% of the partnership, and Joe, the general partner, owns the other 10%. The partnership incurs $50,000 of nonrecourse debt and $100,000 of recourse debt. What effect do the debts have on Ray’s basis? (Points : 5)
Increase of $22,500
Increase of $25,000
Increase of $45,000
Increase of $67,500

2. Which of the following is not a separately stated item
on a partnership’s Schedule K? (Points : 5)

A $5,000 long-term capital loss
$20,000 of Section 1245 recapture
$3,000 charitable contribution
$5,000 bond interest
All are separately stated.

3. A sole proprietorship: (Points : 5)
must be owned by an individual.
provides basic liability protection for the owner.
must use the cash method of accounting.
can pay the owner a salary.
None of the above

4. Carol owns 40% of CJ Partnership. The partnership
reports $170,000 of revenue, $60,000 cost of goods sold, and $70,000 of other expenses that include $1,500 of doctor bills paid for Carol, a $2,000 charitable contribution, and a $5,000 Section 179 deduction. What is the bottom line net income reported on Carol’s Schedule K-1?
$48,500
$40,000
$19,400
$16,000

5. A sole proprietor: (Points : 5)

deducts his or her retirement plan contributions from business income.
may not pay a salary to a related party who works in the business.
deducts employee fringe benefit costs from business income.
files a separate tax return for business income.
All of the above.

6. Material participation includes all of the following except: (Points : 5)

Material participation in 5 of the 10 preceding years.
Taxpayer is the only person participating in the activity.
Taxpayer materially participated in the five preceding years in a personal service activity.
The taxpayer has 500 or more hours of participation
All are material participation standards.

7. Which of the following may not be partners in a
partnership? (Points : 5)
Sole proprietorship
Corporation
S corporation
LLC
All may be partners.

8. Which of the following is not an acceptable partnership
tax year? (Points : 5)

The tax year used by any principal partner
The tax year used by the partners who own a majority interest
A tax year that results in a 2-month deferral of income for the partners
C’s tax year if C owns more than 50% of the partnership
A year-end that coincides with the partnership’s natural business year
9. Which of the following cannot be taxed as a partnership?
(Points : 5)
An accounting PLLC
An LLC with only one member
An LLC owning only rental property
A partnership with no limited partners
All are taxed as partnerships