- During 2025, a sole proprietor paid the following amounts for services in the course of her business:
• $1,200 by check to Consultant A, an individual;
• $480 by check to Consultant B, an individual;
• $2,300 by check to Attorney C, a law firm organized as a professional corporation, for legal services;
• $1,000 by check to CleanCo, a corporation, for office cleaning;
• $760 through an online payment app to Consultant E, an individual.
What total must the sole proprietor report on Form 1099-NEC for 2025?
Answer: $3,500
IRC § 6041 and the 2025 Instructions for Form 1099-NEC. A trade or business must file Form 1099-NEC for payments of $600 or more to a nonemployee for services. Payments to corporations are generally exempt, but payments to a corporation for legal services must be reported, and payments made through a third-party network are reported by the settlement entity on Form 1099-K, not by the payor on Form 1099-NEC. Reportable payments: Consultant A ($1,200, an individual paid by check) and Attorney C ($2,300, legal services; the professional-corporation payee does not exempt legal fees). Total: $1,200 + $2,300 = $3,500. Excluded payments: Consultant B ($480, below the $600 threshold); CleanCo ($1,000, a corporation providing non-legal services, covered by the general corporate exemption); and Consultant E ($760, paid through an online payment app, a third-party network payment reportable under IRC § 6050W by the network, not by the payor). Choice A ($1,200) omits Attorney C, incorrectly applying the corporate exemption to legal fees. Choice C ($4,260) adds Consultant E's payment, disregarding the third-party-network exclusion. Choice D ($4,500) adds CleanCo's payment, applying the reporting rule to a corporation's non-legal services.
- Which of the following correctly describes the 2025 tax treatment of these amounts?
Answer: The guaranteed payment is subject to self-employment tax, but the distributive share is not subject to self-employment tax because Jeff is a limited partner.
IRC § 1402(a)(13) excludes a limited partner's distributive share of partnership income from net earnings from self-employment, except for guaranteed payments described in IRC § 707(c) that are paid for services actually rendered. Jeff is a passive investor whose distributive share is a return on his capital, so the $45,000 is not self-employment income. The $75,000 guaranteed payment compensates him for the engineering review, so it is subject to self-employment tax. Choice B is correct. Choice A treats one paid service engagement as converting his capital return into self-employment income; the services are compensated by the guaranteed payment. Choice C ignores the exception for guaranteed payments for services. Choice D misstates both items: a guaranteed payment for services is not a return of capital, and the distributive share, not the guaranteed payment, is the amount the limited-partner rule excludes.
- What amount of the $41,000 ordinary loss may Marcus deduct on his 2025 Form 1040?
Answer: $38,000
IRC § 1366(d)(1) limits an S corporation shareholder's loss deduction to the sum of the adjusted basis of the shareholder's stock and the adjusted basis of indebtedness of the corporation to the shareholder. Current-year income items, including separately stated income such as the $18,000 of interest, increase stock basis before losses are applied (IRC § 1367(a)(1)(A)). Because the corporation made no distributions, there is no distribution adjustment. Marcus's stock basis becomes $6,000 + $18,000 = $24,000; adding his $14,000 debt basis gives a total loss limitation of $38,000. The remaining $3,000 of the $41,000 loss is suspended under IRC § 1366(d)(2) and carried forward. Choice D is correct. Choice A ignores the basis limitation. Choice B uses only the beginning stock and debt basis, ignoring the increase for the separately stated interest income. Choice C uses the adjusted stock basis but ignores the debt basis. The facts also state that Marcus materially participates and is at risk, so the passive activity and at-risk limitations do not reduce the amount allowed.
- A calendar-year partnership reported $180,000 of ordinary income for 2025 before deducting guaranteed payments. Dana, a 30% partner, received a $15,000 guaranteed payment during the year. The partnership also made a $9,000 charitable contribution and claimed a $6,000 Section 179 deduction; both items are allocated 30% to Dana. What amount of ordinary business income from the partnership must Dana report on Schedule E (Form 1040) for 2025?
Answer: $49,500
IRC §§ 702 and 707(c); 2025 Instructions for Schedule K-1 (Form 1065). A guaranteed payment is deductible by the partnership in computing its ordinary income and is separately reported to the recipient partner; it is not part of the partner's share of ordinary business income (K-1 Box 1). Charitable contributions and Section 179 expense are separately stated items; they pass through to the partner and do not reduce Box 1 ordinary business income. Computation: ($180,000 − $15,000) × 30% = $165,000 × 30% = $49,500. Choice A ($39,000) subtracts the entire $15,000 guaranteed payment from Dana's 30% share; the payment reduces the partnership's income first, so only 30% of it ($4,500) offsets Dana's share. Choice B ($46,800) subtracts Dana's $2,700 share of the charitable contribution (30% of $9,000) from her ordinary income; that item is separately stated on the K-1 and is claimed on her Schedule A. Choice D ($54,000) takes 30% of the $180,000 without reducing for the guaranteed payment.
- For calendar year 2025, which of the following is correct regarding Form 1099-K reporting?
Answer: A third-party settlement organization must file Form 1099-K for a payee only if the payee's gross payments exceed $20,000 and the payee had more than 200 transactions during the calendar year.
IRC § 6050W, as amended by OBBBA § 70432 for 2025, requires a third-party settlement organization to file Form 1099-K only when aggregate payments to a payee exceed $20,000 and the number of transactions exceeds 200. Payment card transactions are reportable without regard to amount. Choice A is correct. Choice B applies the $600 threshold to both TPSO and payment card transactions. Choice C applies the $20,000/200 TPSO threshold to payment card transactions. Choice D states the payment card rule but uses the $2,500 TPSO threshold that the IRS had planned for 2025 before the OBBBA restored the $20,000 and 200-transaction threshold.
- Which of the following is correct regarding Form 1099-K for 2025?
Answer: The credit card payments must be reported on Form 1099-K without regard to any dollar or transaction threshold, but the third-party settlement payments are not required to be reported because the 200-transaction test is not met.
IRC § 6050W requires payment settlement entities to report payment card transactions and third-party network transactions. For payments made in 2025, a third-party settlement organization must report only if payments to a payee exceed $20,000 and the number of transactions exceeds 200; payment card transactions have no such threshold. Here, the $21,800 of third-party settlement payments met the dollar test but failed the 200-transaction test because there were only 160 transactions, so those payments are not reportable on Form 1099-K. The $16,400 of credit card payments is reportable without regard to threshold. Choice C is correct. Choice A misstates the dollar test and wrongly treats the absence of a Form 1099-K as eliminating the reporting of gross income. Choice B ignores the 200-transaction test for third-party settlement payments and wrongly exempts card payments. Choice D aggregates the two categories and ignores the separate transaction-count requirement.
- Which of the following is the correct 2025 tax treatment of the sale?
Answer: Report a $5,000 long-term capital gain on Schedule D and Form 8949 because the boat was a capital asset held more than one year.
IRC § 1001 requires gain to be recognized on the sale of property, and a personal-use boat is a capital asset under IRC § 1221. Because the boat was held for more than one year, the $5,000 gain is long-term capital gain reported on Schedule D and Form 8949. Form 1099-K reports gross proceeds for information purposes and does not determine the amount or character of income. Choice A is correct. Choice B incorrectly treats a personal capital asset as business inventory. Choice C incorrectly treats Form 1099-K amounts as ordinary income. Choice D incorrectly treats the transaction as nontaxable and ignores the gain realized on a personal-use asset.
- In 2025, a taxpayer sold handmade goods online. Customers paid her $21,500 for 210 sales through Marketplace App, a third-party settlement organization (TPSO); the app withheld $1,500 in selling fees and deposited $20,000 into her bank account. Customers also paid her $3,200 for 30 sales through a payment card reader. What total amount will be reported on Forms 1099-K with respect to these 2025 sales?
Answer: $24,700
IRC § 6050W and the 2025 Instructions for Form 1099-K. For 2025, a third-party settlement organization must report payments to a payee only if the payments exceed $20,000 and the number of transactions exceeds 200; payment card transactions are reportable with no de minimis. Marketplace App (a TPSO): $21,500 for 210 transactions meets both tests, so $21,500 is reported. Payment card reader: $3,200 is reported in full regardless of the number of transactions. Total: $21,500 + $3,200 = $24,700. The $1,500 fee does not reduce the amount; Form 1099-K reports the gross amount of reportable transactions, not the net deposit. Choice A ($3,200) reports only the card payments, assuming TPSO payments are never reported on Form 1099-K; a TPSO must report once both the dollar and transaction tests are met. Choice B ($21,500) omits the card payments, applying the TPSO tests to payment card transactions, which have no de minimis. Choice C ($23,200) nets out the $1,500 selling fee; gross payments, not net proceeds, are reported on Form 1099-K.
- A taxpayer owns all of the stock of an S corporation and materially participates in its business. The corporation has no accumulated earnings and profits. Her stock basis on January 1, 2025, was $10,000. During 2025, the corporation made a $4,000 cash distribution to her, and its Schedule K-1 reported an ordinary loss of $16,000 for the year. She made no loans to the corporation, and no other loss limitation applies. What is the amount of the loss she may deduct for 2025, and what is her stock basis at the end of 2025?
Answer: Deduct $6,000 of the loss; her end-of-year stock basis is $0, and the remaining $10,000 loss is suspended and carried over.
IRC § 1366(d)(1) limits an S corporation shareholder's deduction of loss to the adjusted basis of the shareholder's stock plus the adjusted basis of any corporate debt owed to the shareholder. Because the corporation has no accumulated earnings and profits, the $4,000 cash distribution is applied against and reduces her stock basis under IRC § 1368(b). Under the ordering rules of Treas. Reg. § 1.1367-1, that basis reduction occurs before the loss is applied: $10,000 − $4,000 = $6,000 basis remaining. The $16,000 ordinary loss is therefore deductible only to the extent of $6,000 for 2025; the remaining $10,000 is suspended under IRC § 1366(d)(2), and her year-end stock basis is zero. Choice D is correct. Choice A applies the loss before reducing basis for the distribution. Choice B ignores the IRC § 1366(d)(1) basis limitation entirely. Choice C correctly limits the deductible loss to $6,000 but fails to reduce the stock basis by the $4,000 distribution.
- An individual partner receives a 2025 Schedule K-1 (Form 1065) showing $20,000 of ordinary business income, $3,000 of tax-exempt interest, $2,000 of charitable contributions, and a $5,000 cash distribution. Which of the following correctly reports these items on the partner's individual return?
Answer: Report the $20,000 ordinary business income on Schedule E, exclude the $3,000 tax-exempt interest from gross income, claim the $2,000 of charitable contributions on Schedule A only if the partner itemizes, and treat the $5,000 cash distribution as nontaxable to the extent of the partner's outside basis.
Under IRC § 702(a) and (b), the partner takes the K-1 items into account separately, and each item retains its character in the partner's hands. The $20,000 ordinary business income is reported on Schedule E. IRC § 103(a) excludes the $3,000 tax-exempt interest from gross income. The $2,000 charitable contribution is deductible under IRC § 170 only if the individual partner itemizes on Schedule A. Under IRC § 731(a), the $5,000 cash distribution is not taxable to the extent it does not exceed the partner's outside basis. Choice B is correct. Choice A treats the partnership as the taxpayer, treats tax-exempt interest as taxable, treats the distribution as a dividend, and conditions the contribution deduction on allocation rather than itemization. Choice C combines tax-exempt interest with taxable income, misclassifies the charitable contribution as an adjustment to gross income, and treats the distribution as ordinary income. Choice D taxes the tax-exempt interest, treats the charitable contribution as a business expense, and applies a corporate accumulated-earnings standard to the distribution.
- An individual is a general partner in a partnership that operates a trade or business. For 2025, the partner's Schedule K-1 (Form 1065) reports ordinary business income and a guaranteed payment for services rendered. Which of the following is correct regarding the partner's individual return?
Answer: The ordinary business income and the guaranteed payment are both reported on Schedule E; both are included in the partner's net earnings from self-employment for purposes of self-employment tax.
IRC §§ 702, 707(c), and 1402(a) treat a general partner's ordinary business income from a partnership trade or business and guaranteed payments for services as included in net earnings from self-employment, and both are reported on Schedule E (Form 1040). Choice C is correct. Choice A misstates the reporting of guaranteed payments and their self-employment tax treatment. Choice B misstates the character of ordinary business income and guaranteed payments. Choice D misstates the deduction location and self-employment tax treatment.
- A taxpayer operates a sole proprietorship and, for 2025, receives Form 1099-NEC showing $48,000 of nonemployee compensation and Form 1099-K showing $12,000 of payment card receipts from the same business. The taxpayer paid $9,000 of ordinary and necessary business expenses during the year, and the amounts shown on the two forms are not duplicative. Which of the following is correct for reporting this income on the 2025 return?
Answer: Report $60,000 as gross receipts on Schedule C, deduct the $9,000 of paid expenses on Schedule C, and take the resulting $51,000 net profit into account in computing self-employment tax.
IRC § 61 and the Schedule C instructions require a sole proprietor to report total gross receipts, including amounts shown on Form 1099-NEC and Form 1099-K, on Schedule C, and IRC § 162 allows deduction of ordinary and necessary business expenses. The resulting net profit is taken into account in computing net earnings from self-employment under IRC § 1402(a). Choice B is correct. Choice A misstates placement and allocation by splitting the income between Schedule C and Schedule 1 and restricting the expense deduction to the nonemployee compensation. Choice C misstates the self-employment tax treatment: the $12,000 of payment card receipts is business gross receipts of the sole proprietorship and, through the $51,000 net profit, enters the computation of net earnings from self-employment; the kind of information return on which a payment is reported does not control. Choice D misstates Schedule C mechanics and wrongly excludes the net profit from self-employment tax.
- Which of the following is correct regarding the treatment of the Schedule K-1 items on Rosa's 2025 return?
Answer: The $25,000 ordinary business income is reported on Schedule E and increases stock basis; the $2,000 charitable contribution is reported on Schedule A and reduces stock basis.
Under IRC §§ 1366(a) and (b), S corporation items pass through separately and retain their character. Ordinary business income is reported on Schedule E, is not subject to self-employment tax, and increases stock basis under IRC § 1367(a). A charitable contribution passed through from an S corporation is an itemized deduction on Schedule A if the shareholder itemizes, and it reduces stock basis. Choice A is correct. Choice C incorrectly combines the charitable contribution with ordinary business income. Choice B incorrectly treats the contribution as deductible in computing adjusted gross income. Choice D incorrectly treats S corporation ordinary income as self-employment income and incorrectly denies the charitable deduction.
- How is the $120,000 distribution taxed on Ava's 2025 individual income tax return?
Answer: $70,000 is tax-free as a return of basis, and the $50,000 excess is taxed as capital gain.
IRC § 1368(b) provides that a distribution from an S corporation without accumulated earnings and profits is tax-free to the extent of the shareholder's adjusted stock basis, and any excess is treated as gain from the sale or exchange of the stock. Ava's $70,000 basis absorbs that amount tax-free, and the remaining $50,000 is capital gain. Choice B is correct. Choice A ignores the excess over basis. Choice C wrongly recharacterizes a distribution as wages when Ava was paid a separate salary. Choice D is inconsistent with § 1368(b) because the corporation has no accumulated earnings and profits.
- What amount of the $12,000 ordinary loss may Dana deduct for 2025?
Answer: $6,000
Under IRC §§ 704(d) and 705(a), a partner's deduction of an ordinary loss is limited to the adjusted basis of the partner's interest at the end of the partnership's taxable year, determined before applying the current-year loss. Basis is increased by the partner's share of taxable income and tax-exempt income and is decreased by distributions. Dana's basis is $2,000 + $8,000 + $6,000 = $16,000; the $10,000 distribution reduces it to $6,000. She may deduct $6,000 of the $12,000 loss, and the remaining $6,000 is suspended under §704(d). Because Dana's at-risk amount is not less than her adjusted basis and she materially participates, the at-risk rules under §465 and the passive activity loss rules under §469 do not further limit the deduction. Choice C is correct. Choice A ignores the basis limitation. Choice B uses only the beginning basis and ignores the current-year adjustments. Choice D reflects the common error of excluding tax-exempt income from basis; tax-exempt income does increase a partner's outside basis even though it is not taxable.
