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WorksheetsAC471 Exam Three Review
Total questions: 64
Worksheet time: 32mins
Which of the following is NOT a characteristic of a partnership?
Must have a profit motive
Can include arrangements to share expenses
Is a flow-through entity
Income and losses are allocated to owners
What is the primary tax characteristic of a flow-through entity?
The entity pays income tax on behalf of its owners
The entity's income is taxed at a flat rate
Income and losses are allocated to the owners
The entity is exempt from income tax
What is the primary difference between a general partner and a limited partner?
General partners have limited liability, while limited partners have unlimited liability
General partners have management rights, while limited partners do not
General partners are not subject to self-employment tax, while limited partners are
General partners have no liability for partnership debts
Which type of partnership requires filing articles of organization with the state?
General partnership
Limited partnership
Both
Neither
How is recourse debt allocated in a partnership?
Based on profit-sharing percentages
Only to general partners with economic risk of loss
Equally among all partners
To partners with the highest capital contributions
A partner's initial outside basis includes all of the following EXCEPT:
Basis of assets contributed
Share of partnership debt
FMV of partnership distributions
Share of income allocations
A partnership can exist even without a profit motive
True
False
A partner's outside basis can never go below zero
True
False
A limited partner is subject to self-employment tax on both ordinary income and guaranteed payments
True
False
Nonrecourse debt is allocated to all partners according to their profit-sharing percentages
True
False
Contributions of property to a partnership typically trigger a gain or loss for the contributing partner
False
True
A partner's capital account measures the FMV of their economic investment in the partnership
True
False
Which of the following best describes a partner's capital accounts?
The partner's tax basis in their partnership interest
The FMV of the economic investment a partner has in the partnership
The partnership's basis in its own assets
A fixed account that does not change after formation
What does a partnership agreement typically define?
The allocation of profits and losses between partners
The amount of self-employment tax owed by each partner
The type of debt the partnership can incur
The FMV of assets contributed to the partnership
A partner's partnership interest represents their ownership and economic rights in the partnership, including profit and loss allocation and distribution rights
True
False
If nonrecourse debt relief exceeds the basis of property contributed, how is the excess allocated?
Equally among all partners
Entirely to the contributing partner
To the contributing partner first, with the remainder allocated normally
The partnership retains the excess
If the recourse debt relief exceeds the basis of property contributed, the contributing partner must recognize gain equal to the excess
True
False
What determines the holding period for a partner's partnership interest?
The partnership's use of the contributed
The type of asset contributed by the partner
The FMV of the partnership interest received
The method of debt allocation in the partnership
A partnership interest is always considered a capital asset
True
False
What happens to a partner's outside basis when they contribute property subject to debt?
Decreases by the full amount of the debt
Increases by the full amount of the debt relief
Decreases by the debt relief and increases by their allocated share of the debt
Remains unaffected by the debt contributioin
Partnerships must use the accrual accounting method if a C Corporation is one of the partners
True
False
Which of the following is an example of a separately stated item?
Ordinary business income
Guaranteed payments
Long-term capital gains
Depreciation expense
Guaranteed payments to a partner are:
Reported as wages on W-2
Subject to self-employment tax for both general and limited partners
Not deductible by the partnership
Allocated equally among all partners
The partnership's holding period for contributed property always "tacks on" to the contributing partner's holding period
True
False
What is the initial outside basis for a partner receiving only a profits interest in exchange for services?
The FMV of the profits interest
$0
The value of the services provided
Equal to the partner's share of liabilities
Which of the following adjustments is made first when calculating a partner's outside basis?
Reductions for nondeductible expenses
Reductions for losses
Increases for tax-exempt income
Capital accounts under 704(b) are increased by partnership debt
True
False
Under 704(b), allocations must have substantial economic effect. This ensures:
Allocations match the economic arrangement between partners
Losses can be allocated arbitrarily to partners with low outside basis
All partners share income and losses equally
Partners can reallocate deductions to minimize tax
When built-in gain (BIG) property is sold, the gain up to the amount of the BIG is first allocated to the contributing partner
True
False
Which limitation applies to the deduction of a partner's share of partnership loss?
Loss cannot exceed the partner's share of liabiliteis
Loss cannot exceed the partner's outside basis
Loss cannot exceed the fair market value of the partnership interest
Loss cannot exceed the partner's capital account balance
The ceiling rule limits the allocation of BIG or BIL to the contributing partner to:
The fair market value of the property
The outside basis of the partner
The overall partnership gain or loss on the sale of the property
The book value of the partnership
A general partner’s self-employment income includes their distributive share of ordinary business income and guaranteed payments
True
False
Which of the following is not considered net investment income when allocated to a partner?
Dividend Income
Rental Income
Interest Income
Long-term Capital Gains
The QBI deduction for noncorporate partners is generally equal to:
10% of their share of qualified business income
20% of their share of qualified business income
30% of their share of qualified business income
It depends on their taxable income
Disallowed losses under §704(d) are carried forward indefinitely and can be deducted when sufficient outside basis is restored.
True
False
A partner recognizes a gain when they receive a cash distribution in excess of their outside basis
True
False
When a partner receives a current distribution of cash and noncash property, and the cash component does not exceed their outside basis, the partner will
Recognize a loss equal to the basis of the noncash property
Recognize a gain equal to the FMV of the noncash property
Reduce the basis of the noncash property to ensure outside basis is not negative
Adjust their outside basis to zero
In a current distribution, which assets must a partner adjust first if the cash component does not exceed their outside basis?
All assets proportionately based on FMV
Category 2 noncash assets first, then Category 1 assets
Category 1 assets first, then Category 2 assets
Noncash assets with the highest FMV first
After a liquidating distribution, a partner's outside basis will always be:
Equal to the FMV of the property received
Reduced to zero
Increased to match the partnership’s inside basis
Based on the partner’s share of unrealized gains
If a partner receives only cash in a liquidating distribution, they may recognize either a gain or a loss, which is typically capital in nature.
True
False
If a partner receives cash and noncash property in a liquidating distribution, and the cash component does not exceed the partner’s outside basis, the basis of noncash property must be:
Increased or decreased to bring the partner’s outside basis to zero
Increased only, using the FMV of the property
Decreased to match the partnership's inside basis
Left unchanged if cash does not exceed outside basis
In a liquidating distribution, a partner must decrease the basis of Category 1 assets (inventory and receivables) before adjusting Category 2 assets.
True
False
Which of the following is considered a Category 1 asset in a distribution?
Cash
Inventory
Land held for investment
Equipment
If multiple Category 1 assets are distributed in a current distribution and a basis reduction is required, the reduction is first applied:
Equally to all assets in the category
To assets with FMV greater than basis
In proportion to the difference between FMV and basis
Based on the FMV of each asset
In a liquidating distribution, unrealized appreciation is used to determine how to increase the basis of Category 2 assets.
True
False
A §754 election allows a partnership to adjust the inside basis of its assets whenever a partner recognizes gain or loss on a distribution.
True
False
If a partner recognizes a gain during a distribution and the partnership has made a §754 election, the partnership can:
Increase the basis of the distributed assets
Increase the basis of the remaining partnership assets
Decrease the outside basis of other partners
Ignore the gain and make no adjustments
Which of the following is considered a "hot asset" for §751(b) purposes?
Equipment with unrealized appreciation
Land held for investment
Accounts receivable
Cash
If a partner receives a disproportionate share of "cold" assets in exchange for "hot" assets under §751(b), the partner will:
Recognize ordinary income equal to the FMV of the "cold" assets received
Recognize ordinary income as if the partnership sold the "hot" assets
Defer recognition of income until the assets are sold
Recognize capital gain equal to the difference between the basis and FMV of the "cold" assets
A partnership step-down in basis under §754 is required when a partner recognizes a loss or increases the basis of distributed assets.
True
False
When a partner sells their interest in a partnership, the partner’s amount realized includes:
Cash and property received but excludes relief of partnership liabilities
Cash, property received, and relief of partnership liabilities
Only the cash portion of the sale price
The partner’s share of unrealized receivables
Under a §754 election, adjustments to the inside basis of partnership assets apply only to the partner involved in the triggering event.
True
False
A partner who sells their interest in a partnership recognizes ordinary income on the portion of the gain attributable to "hot assets."
True
False
A §754 election, once made, is irrevocable and applies to all future distributions and transfers involving the partnership.
True
False
Which of the following is not considered a hot asset when calculating ordinary income in the sale of a partnership interest?
Unrealized receivables
Land held for investment
Inventory
Prepaid services
The portion of gain attributable to unrealized receivables in the sale of a partnership interest is characterized as ordinary income, even if the overall sale results in a loss.
True
False
A partner sells their partnership interest for $100,000. The buyer assumes $25,000 of the selling partner's share of partnership liabilities. The seller’s outside basis is $80,000. What is the partner’s realized gain or loss?
$45,000 gain
$25,000 gain
$45,000 loss
$25,000 loss
A partner sells their interest in a partnership that owns inventory and unrealized receivables. If the total gain from the sale is $50,000, and $15,000 is attributable to unrealized receivables, how will the gain be characterized?
$50,000 ordinary income
$15,000 ordinary income and $35,000 capital gain
$50,000 capital gain
$35,000 ordinary income and $15,000 capital gain
A purchaser buys a partnership interest for $120,000 and assumes $30,000 of partnership liabilities. What is the purchaser’s outside basis in the partnership interest?
$90,000
$120,000
$150,000
$30,000
A §754 election can adjust the inside basis of a partnership’s assets to align with the new partner’s outside basis following the purchase of a partnership interest.
True
False
A purchaser’s outside basis in a partnership interest is $200,000, but their share of the inside basis of the partnership assets is $150,000. If the partnership has a §754 election in effect, what adjustment will be made?
Step-down of $50,000 to the inside basis
Step-up of $50,000 to the inside basis
No adjustment, as outside and inside basis are unrelated
Allocate $50,000 gain to other partners
If a partnership does not have a §754 election in effect, there will be no adjustment to the inside basis of the partnership’s assets after the sale of a partnership interest.
True
False
Which of the following statements about hot assets is true?
Only substantially appreciated inventory is considered a hot asset for sales of partnership interests.
Hot assets always produce capital gains.
Hot assets include unrealized receivables and all inventory.
Hot assets only affect the purchaser of the partnership interest.
Under a §754 election, if a step-down adjustment is required due to a mismatch between the outside and inside basis, the adjustment:
Reduces the outside basis of the purchaser
Increases the gain recognized by the selling partner
Decreases the inside basis of partnership assets allocated to the purchaser
Does not apply because only step-ups are allowed
