Chapter 1, Problem 13DQ

Which of the following may not be treated as a partnership for tax purposes? Arnold and Willis operate a restaurant. Thelma and Louise establish an LLP to operate an accounting practice. Lucy and Desi purchase real estate together as a business. Jennifer and Ben form a corporation to purchase and operate a hardware store. All of the above are partnerships.

Matilda is a limited partner in Partnership JKL, and she does not materially participate in the business. Choose the response that correctly completes the last sentence about her ability to claim the qualified business income deduction. If she is eligible for the deduction, select the response that describes how the amount of her deduction is computed. If she is not eligible, select the response that correctly explains the reason why she cannot claim the deduction. Matilda is:   (a) Eligible for the deduction, and the exact amount she is eligible to deduct is computed on the partnership's tax return and reported to her on Schedule K-1 (Form 1065). (b) Eligible for the deduction, but she must figure the exact amount she is eligible to deduct based on information the partnership provides on her Schedule K-1 (Form 1065). (c) Not eligible for the deduction because she is not a general partner. (d) Not eligible for the deduction because she does not materially participate in the business.

Donna does not think she has an income tax problem but would like to discuss her situation with you just to make sure there is no unexpected tax liability. Base your suggestions on the following relevant financial information: a. Donnas share of the SAT Partnership income is 150,000, but none of the income can be distributed because the partnership needs the cash for operations. b. Donnas Social Security benefits totaled 8,400, but Donna loaned the cash received to her nephew. c. Donna assigned to a creditor the right to collect 1,200 of interest on some bonds she owned. d. Donna and her husband lived together in California until September, when they separated. Donna has heard rumors that her husband had substantial gambling winnings since they separated.