ACG3173 Exam 3 Practice

Artichoke, a single individual, operates a service business that earned $87,000 during the tax year. The business has no tangible property and paid no W-2 wages. Compute Artichoke's Qualified Business Income (QBI) deduction, assuming his overall taxable income before QBI is $125,000.

Answer explanation

QBI During Tax Year

x QBI Deduction

Taxed QBI

This year, Herb Partnership generated $600,000 ordinary business income. Herb has two equal partners: Savory LLC and Sweet Corp., an S corporation. Savory LLC has three members: Mr. Parsley, an individual who owns a 45 percent interest; Mrs. Rosemary, an individual who owns a 35 percent interest; and Sage Inc., a C Corporation which owns a 20 percent interest. Sweet Corp. has 100 shares of outstanding stock, all of which are owned by Ms. Mint, an individual. Identify the amount of income allocated from Herb partnership to Mr. Parsley.

Answer explanation

(Business Income x 0.50)

x % of Parsley's Ownership

Income Allocated to Parsley

Garlic, an individual, is a limited partner in Onion Partnership. This year, Garlic's share of partnership ordinary income is $10,000, and she received a cash distribution of $30,000. Garlic's tax basis in her partnership interest at the beginning of the year was $55,000. Her marginal tax rate is 22 percent. Garlic qualifies for the QBI deduction, without regard to any limitations on this QBI deduction. Compute Garlic's tax basis in her partnership interest at the ending of the year. Assume no change in her share of partnership liabilities during the year.

Answer explanation

Garlic Beginning Basis

• + Garlic Operating Income

• - Garlic Cash Distribution

• Garlic End of Year Tax

Jalapeño Corporation and Habanero Corporation formed a partnership to construct a restaurant. Jalapeño contributed $503,000 cash, and Habanero contributed land ($503,000 FMV and $433,000 basis) in exchange for a 50 percent interest in Pepper Partnership. Immediately after its formation, Pepper Partnership borrowed $251,500 from a local bank. The debt is recourse (unsecured by any specific partnership asset). Compute Jalapeno’s initial basis in its partnership interest, assuming that both Jalapeño and Habanero are general partners.

Answer explanation

Jalapeno Contribution

• + (Jalapeno Resource Share x 0.50)

• Jalapeno Initial Basis

This year, individual Kale and individual Spinach formed Leafy Green Partnership. Kale contributed $71,750 cash, and Spinach contributed business assets with a $71,750 FMV. Spinach’s adjusted basis in these assets was only $14,350. The partnership agreement provides that income and loss will be divided equally between the two partners. Partnership operations for the year generated a $59,200 loss. Determine the adjusted basis at the beginning of next year for Partner Kale.

Answer explanation

Kale Initial Basis

• - (Total Loss x 0.50)

• Kale Adjusted Basis

On January 1, Year 1, Carrot, an individual, paid $22,900 for 5 percent of the stock in Root Corp., an S corporation. In November, he loaned $10,850 to Root Corp. in return for a promissory note. Root Corp. generated a $764,000 operating loss in Year 1. How much of his share of the loss can Carrot deduct on his Year 1 return?

Answer explanation

Carrot Paid for Stock

• + Carrot November Loan

• Carrot Deduction in Year 1

On January 1, Year 1, Ginger, an individual, paid $23,000 for 6 percent of the stock in Root Corp., an S corporation. In November Year 1, he loaned $11,000 to Root Corp. in return for a promissory note. Root Corp. generated a $600,000 operating loss in Year 1. Root Corp. generated $416,000 ordinary business income in Year 2. Compute Ginger’s basis in his Root Corp. stock at the end of Year 2.

Answer explanation

Part A:

(Operating Loss x % of Stock)

• - Ginger Paid for Stock

• - Ginger November Loan

• Income Carried to Year 2

Part B:

(Business Income x % of Stock)

• - Income Carried to Year 2

• Taxable Income

• - Ginger November Investment

• Ginger Basis in Stock

On January 1, Year 1, Radish, an individual, paid $15,000 for 5 percent of the stock in Root Corp., an S corporation. In November Year 1, he loaned $8,000 to Root Corp. in return for a promissory note. Root Corp. generated a $600,000 operating loss in Year 1. Root Corp. generated $280,000 ordinary business income in Year 2. In Year 3, Root Corp. repaid its $8,000 debt to Radish before he restored any basis in the debt. How much gain, if any, will Radish recognize as a result of the debt repayment in Year 3?

Answer explanation

Part A:

Radish Paid for Stock Year 1

• + Radish November Loan Year 1

• Radish Net Interest Year 1

Part B:

(Operating Loss Year 1 x % of Stock)

• - Radish Net Interest Year 1

• Unrecognized Loss Year 1

Part C:

(Operating Loss Year 2 x % of Stock)

• - Unrecognized Loss Year 1

• Radish Net Interest Year 2

Part D:

Radish November Loan Year 1

• - Radish Net Interest Year 2

• Radish Gain on Loan

At the beginning of Year 1 Ms. Mushroom, an individual, purchased a 15 percent interest in Fungi Partnership for $23,000. Ms. Mushroom’s Schedule K-1 reported that her share of Fungi’s debt at year-end was $17,000, and her share of ordinary loss was $36,550. On January 1, Year 2, Ms. Mushroom sold her interest to another partner for $2,500 cash. How much of her share of Fungi’s loss can Ms. Mushroom deduct on her Year 1 tax return?

Answer explanation

Mushroom Ordinary Loss = Tax Deduction Year 1

Potato, an individual, is a 20 percent owner of Starch LLC. This year, Potato was allocated $45,000 of ordinary income from Starch LLC, $1,000 of tax-exempt interest income, and $2,000 of nondeductible expenses. Potato also received a $10,000 distribution from Starch LLC this year. At the beginning of the year, Starch LLC had outstanding debt of $100,000. At the end of the year, the entity’s outstanding debts increased to $130,000. If Starch LLC is taxed as a partnership, and her basis in her partnership interest at the beginning of the year is $90,000, determine Potato's tax basis in her partnership interest at year-end.

Answer explanation

Potato Beginning Basis

• + Potato Ordinary Income

• + Potato Tax Exempt Income

• - Potato Nondeductible Expense

• - Potato Distributions

• + (% of Ownership (Increased Debt - Outstanding Debt))

• Potato Ending Basis