Chapter 10 In-Class Worksheet

You have evaluated the business financial records of a calendar year, accrual-basis taxpayer and determined the
following information will be relevant in the preparation of the appropriate tax return and/or calculation of
basis.

Sales $150,000
Dividend revenue 500
Capital gain 2,000
Cost of goods sold 60,000
Depreciation (tax) 12,000
Insurance expense 3,000
Office supplies expense 1,100
Fines and penalties 300
Repairs expense 1,800
Utilities & telephone expense 800
Employee salaries 30,000
J’s compensation (i.e. cash withdrawal) 25,000
Payroll tax expense ?

1) Assume this business is organized as a sole proprietorship and that the owner has no other income.
a) Calculate payroll tax expense (FICA only).
b) Calculate gross and net ordinary business income that would appear on Schedule C.

c) Calculate SE tax and the associated deduction.

d) Identify items that would appear elsewhere on the taxpayer’s Form 1040 or various accompanying
schedules and/or forms.

e) Determine the amount and character of this taxpayer’s total taxable income.

2) Assume this business is organized as a partnership with 2 partners, J & K, which share equally in the
partnership income, gains, and losses. J is a general partner and K is a limited partner. J’s compensation of
$25,000 is a guaranteed payment.
a) Calculate payroll tax expense (FICA only).
b) Calculate gross and net ordinary business income that would appear on Form 1065.

c) Identify the separately stated items.

d) Summarize the information that will be reported on each partner’s K-1.

 e) Which partner will be subject to SE tax (which will be reported on his/her Form 1040)? Calculate the
amount of the SE tax and associated deduction.

f) Both partners began the year with a basis in the partnership interest of $45,000, and the partnership
incurred $10,000 in recourse debt during the current year. Calculate each partner’s year-end partnership
basis.

3) Assume the business is organized as an LLC with two members, J and K, who perform essentially the same
roles as indicated in part 2 (i.e. J participates in the day-to-day operation of the business while K does not).
a) How would this LLC assumption change your answer to 2f?
b) The Internal Revenue Code does not address the issue of SE tax for LLC members. How would you
advise J and K in this matter?

4. Assume this business is organized as a subchapter S corporation, and that shareholders, J and K, each own
50% of the outstanding stock of the corporation.
a) Calculate payroll tax expense (FICA only).
b) Calculate gross and net ordinary business income that would appear on Form 1120S.

c) Identify the separately stated items.

d) Summarize the information that will be reported on each shareholder’s K-1.

e) Which shareholder will be subject to SE tax (which will be reported on his/her Form 1040)?

f) Both shareholders began the year with a $45,000 basis in their shares of corporate stock. The
corporation incurred $10,000 in debt during the current year. Calculate each shareholder’s year-end
basis in corporate stock.