AFTR AFTR Business Tax Basics 2 — Questions and Answers
Question 1: A partnership reports its income, deductions, and credits to partners using which form?
- Form 1065 with Schedule K-1 (Correct answer)
- Form 1120-S with Schedule K-1
- Form 1041 with Schedule K-1
- Form W-2
Correct answer: Form 1065 with Schedule K-1
Partnerships file Form 1065 as an informational return and issue Schedule K-1 to each partner showing their distributive share of income, deductions, and credits.
Question 2: An S corporation shareholder who is also an employee must receive:
- Only distributions, never a salary
- A reasonable salary subject to payroll taxes before taking distributions (Correct answer)
- Guaranteed payments like a partnership
- A 1099-NEC for all compensation
Correct answer: A reasonable salary subject to payroll taxes before taking distributions
S corporation shareholder-employees must receive reasonable compensation (salary) subject to FICA taxes; the IRS scrutinizes attempts to avoid payroll taxes by taking only distributions.
Question 3: Business meals that are 50% deductible must be:
- Lavish or extravagant
- Ordinary and necessary, with a business purpose, and not solely for entertainment (Correct answer)
- Taken only with clients, never with employees
- Documented by a receipt regardless of amount
Correct answer: Ordinary and necessary, with a business purpose, and not solely for entertainment
Business meals are 50% deductible if they are ordinary and necessary, have a bona fide business purpose, and are not lavish or extravagant.
Question 4: Startup costs that exceed the $5,000 first-year deduction limit must be:
- Immediately expensed in full under Section 179
- Amortized over 180 months (15 years) beginning with the month the business starts (Correct answer)
- Added to inventory cost basis
- Carried forward as a net operating loss
Correct answer: Amortized over 180 months (15 years) beginning with the month the business starts
Startup costs exceeding the $5,000 immediate deduction (which phases out above $50,000 in total startup costs) must be amortized over 180 months starting when the business begins.
Question 5: Which of the following is NOT a deductible business expense for a sole proprietor?
- Business-related travel expenses
- Office supplies used in the business
- Personal life insurance premiums (Correct answer)
- Business-portion of vehicle expenses
Correct answer: Personal life insurance premiums
Personal life insurance premiums are a personal expense and are not deductible as a business expense on Schedule C.
Question 6: The Section 199A qualified business income (QBI) deduction generally allows eligible pass-through owners to deduct up to what percentage of qualified business income?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
The Section 199A deduction allows eligible self-employed individuals and pass-through entity owners to deduct up to 20% of qualified business income, subject to limitations.
AFTR AFTR Business Tax Basics 2
A partnership reports its income, deductions, and credits to partners using which form?